"The sharp increase in borrowing costs is likely to exert a significant drag on housing market activity in the near term"
The latest figures released by Nationwide have revealed that house prices remained broadly flat in June. However, annual growth continues to sit in negative territory - down 3.5% compared with June 22.
Northern Ireland was this quarter's outlier according to the stats which revealed a modest 0.7% year-on-year price rise, making it the best-performing region, with all other regions recording annual price falls in Q2.
East Anglia was the weakest performing region with prices down 4.7% year-on-year
Robert Gardner, Nationwide's Chief Economist, comments: “Annual house price growth remained steady at -3.5% in June, little changed from the 3.4% decline recorded in May. Prices were also fairly stable over the month, rising by a modest 0.1%, after taking account of seasonal effects, reversing the 0.1% decline seen in May.
“Longer term interest rates, which underpin mortgage pricing, have increased sharply in recent months, in response to data indicating that underlying inflation in the UK economy is not moderating as fast as expected. This has prompted investors to expect the Bank of England to increase its policy rate further and for it to remain higher for longer.
“Longer-term borrowing costs have risen to levels similar to those prevailing in the wake of the mini-Budget last year, but this has yet to have the same negative impact on sentiment. For example, the number of mortgage applications has not yet declined and indicators of consumer confidence have continued to improve, though they remain below long-run averages.
Higher interest rates impacting affordability
“The sharp increase in borrowing costs is likely to exert a significant drag on housing market activity in the near term. For example, for a representative first-time buyer earning the average wage and buying the typical property with a 20% deposit, mortgage payments as a share of take-home pay are now well above the long-run average.
“Moreover, house prices remain high relative to earnings, and as a result, deposit requirements are still a significant barrier for those looking to enter the market. A 10% deposit on a typical first-time buyer home is equal to around 55% of gross annual income – this is down from the all-time highs of 59% prevailing in late 2022, but still marginally above the levels prevailing before the financial crisis struck in 2007/8.
“Despite the higher interest rates available to savers, the sharp rise in rents, together with continued high rates of inflation more generally is continuing to make it difficult for many prospective buyers to save for a deposit.
Possibility of soft landing remains possible
“Nevertheless, a relatively soft landing is still possible, providing the broader economy performs as we (and most other forecasters) expect.
“Labour market conditions are expected to remain relatively robust, with the unemployment rate remaining below 5%, while income growth is projected to remain solid. With Bank Rate likely to peak in the quarters ahead, longer-term interest rates should also start to fall back.
“As a result, a combination of healthy rates of income growth and modest price declines should improve affordability over time, especially if mortgage rates moderate.
“Our regional house price indices are produced quarterly with data for Q2 (the three months to June) showing annual price declines in all regions, except Northern Ireland.
“Northern Ireland saw a modest 0.7% year-on-year price rise, making it the best-performing region. Meanwhile, East Anglia was the weakest performing region, with prices down 4.7% compared with a year ago.
“All English regions saw a slowing in the annual rate of change compared with last quarter. London saw a 4.3% year-on-year decline, while the surrounding Outer Metropolitan region saw a 2.9% fall.
“Across northern England overall (which comprises North, North West, Yorkshire & The Humber, East Midlands and West Midlands), prices were down 2.7% compared with Q2 2022.
"The North West was the weakest-performing northern region, with prices down 4.1% year-on-year. Meanwhile southern England (South West, Outer South East, Outer Metropolitan, London and East Anglia) saw a 3.8% decline.
“Scotland saw a slight improvement in the annual rate of change to -1.5%, from -3.1% last quarter.
"Meanwhile, Wales saw a further slowing in annual house price growth from -0.7% to -1.7%.”
Nathan Emerson, CEO of Propertymark comments: "Despite the current economic conditions, our members report only a slight dip in the number of buyers coming to the market when compared to last year when the sales market was in a frenzy. However, many are being more cautious before deciding to make a purchase.
"In addition, what's also positive is the number of properties on the market increasing. In turn, this is providing more choice for serious buyers and we are seeing people negotiating harder on the sale price of their future homes.”
Tom Bill, head of UK residential research at Knight Frank, said: “While we are still playing the guessing game of how much higher the Bank of England will push rates, sentiment in the housing market will remain weak. Buyers find it difficult to plan as budgets get recalculated and there is uncertainty over what happens next to property values, which means sensitivity around asking prices has become acute.
"Prices will come under growing pressure given how much higher mortgage costs are compared to 18 months ago and we expect a 10% decline, spread over this year and 2024. When stability returns, we think demand will prove more resilient than expected given the cushioning effect of strong wage growth, record levels of housing equity, amassed lockdown savings, the availability of longer mortgage terms, forbearance from lenders and the popularity of fixed-rate deals in recent years.”