UK house prices fall at fastest rate since 2009 as rising interest rates hit affordability

UK house prices fall at fastest rate since July 2009

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

UK house prices have fallen at their fastest rate since July 2009 as rising interest rates cool the property market.

Nationwide has reported this morning that the average house price fell by 3.8% year-on-year in July, the biggest drop since the aftermath of the financial crisis.

That’s an increase on the 3.5% annual drop in house prices in June, and takes the price of a typical home down to 4.5% below the August 2022 peak.

Prices dipped by 0.2% in July alone, on a seasonally adjusted basis, to an average of £260,828, down from £262,239.

Robert Gardner, Nationwide’s chief economist, says the increase in interest rates in recent months have made it more challenging for prospective buyers to afford a mortgage on a new home.

Gardner explains:

For example, a prospective buyer, earning the average wage and looking to buy the typical first-time buyer property with a 20% deposit, would see monthly mortgage payments account for 43% of their take home pay (assuming a 6% mortgage rate). This is up from 32% a year ago and well above the long-run average of 29%.

Moreover, deposit requirements continue to present a high hurdle – with a 10% deposit equivalent to 55% of gross annual average income.

This challenging affordability picture helps to explain why housing market activity has been subdued in recent months. There were 86,000 completed housing transactions in June, 15% below the levels prevailing the same time last year and around 10% below pre-pandemic levels.

More timely mortgage approval data showed a slight increase in activity in June, though most of these applications will pre-date the more recent rise in longer term interest rates. Moreover, activity is still c20% below 2019 levels.

A chart showing mortgage rates — Photograph: Nationwide

Data from the Bank of England yesterday showed that mortgage approvals in the UK rose to their highest level since October 2022 last month.

That indicates borrowers were scrambling to secure home loan deals earlier this year before interest rates rose higher.

Also coming up today

UK food inflation has dropped to its lowest level this year. Food inflation decelerated to 13.4% in July, down from 14.6% in June, according to the British Retail Consortium.

This is the lowest food inflation level since December 2022, with prices falling cross key staples such as oils, fats, fish, and breakfast cereals.

Major blue-chip companies HSBC and BP are reporting results this morning.

HSBC has more than doubled its pre-tax profits to $21.7bn, including a provisional gain of $1.5bn on the acquisition of Silicon Valley Bank UK Limited.

BP’s profits have dropped, though, following the decline in oil and gas prices compared to last year. The oil giant still made underlying profits of $2.6bn for the second quarter of the year, down from almost $5bn BP made in January-March, while it made almost $8.5bn in the second quarter of 2022.

The agenda

7am: Nationwide house price index for July
9am BST: Eurozone manufacturing PMI report for July
9.30am BST: UK manufacturing PMI report for July
10am BST: Eurozone unemployment report for June
3pm BST: US manufacturing PMI report for July
3pm BST: US JOLTS job openings report for June

Key events

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, forecasts that prices have further to fall, saying:

“We think that house prices will have to fall by about 8% from their peak before demand and supply come back into balance.”

With the Bank of England poised to raised interest rates again on Thursday, the housing market is likely to continue to cool this year as mortgage rates remain elevated.

So predicts Victoria Scholar, head of investment at interactive investor, who explains:

UK Nationwide house prices fell by 3.8% year-on-year in July and 0.2% month-on-month. The average house price stands at £260,828, down from £262,239 last month. According to Nationwide, a typical first-time buyer with a 20% deposit is required to spend 43% of their take-home pay on mortgage payments, up sharply from 32% last year and above the long-run average of 29%.

The annual reading suffered its largest decline since 2009 as rising mortgage rates and the cost-of-living crisis dampen demand for properties in Britain. The housing market is in the doldrums with sellers struggling to achieve their desired offers and therefore are less willing list their properties.

For buyers, the affordability crisis has intensified after borrowing became significantly more expensive. For homeowners, weaker house prices has resulted in a negative wealth effect by reducing the value of their prized assets. For first time buyers, weaker house prices are a positive, however prices are yet to come down significantly enough to offset the pressures from rising mortgage rates.

🇬🇧 Britain’s house price slump deepened after a jump in borrowing costs and the threat of worse to come held back demand from potential buyers.

Nationwide Building Society said its measure of prices fell 3.8% from a year ago, the most since 2009 and quicker than the 3.5% drop… pic.twitter.com/S27wjn3Vw3

— Jack Hoogland (@jack_hoogland) August 1, 2023

Falling house prices: industry reacts

Getting back to the drop in UK house prices…

Chris Hodgkinson, managing director of House Buyer Bureau, argues that the UK is not experiencing a house price crash:

“The weakest level of annual house price growth since July 2009 is sure to cause alarm for the nation’s home sellers and many will be keen to sell their home quickly before the rot sets in any further.

The good news is that we’re not in the midst of a market crash, albeit we are seeing a downward correction. However, the real challenge at present is the heightened level of market instability, the ability to actually find a buyer in a proceedable position and, once you have, making it through to completion without the transaction falling through.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, points out that some major lenders have recently cut their mortgage rates.

“With another 25 basis points interest rate rise expected from the Bank of England later this week, we are not out of the woods just yet when it comes to rising mortgage costs.

“However, a few lenders, including HSBC, Barclays and Nationwide, have reduced their fixed-rate mortgage pricing on the back of better-than-expected inflation news. This has led to a calming of swap rates, which underpin the pricing of fixed-rate mortgages, after weeks of considerable volatility.”

Nicola Schutrups, managing director at mortgage broker The Mortgage Hut, warns that “the direction of travel is now pretty clear”.

There’s a lot of uncertainty among people looking to purchase a new home, so it’s no surprise prices continued to edge down on both a monthly and annual basis in July.

Further falls in house prices are likely for the rest of 2023 but if inflation continues to come down and the jobs market remains strong, there’s still a chance for a soft landing.”

In the City, shares in HSBC have jumped 2.1% at the start of trading on the London stock market after it more than doubled its profits for the first half of the year.

They’ve hit a four-year high.

Traders are pleased that HSBC has announced its second $2bn share buyback of the year, as it continues to benefit from rising global interest rates.

Richard Hunter, head of markets at interactive investor, has analysed HSBC’s results, and reports:

Overall, the release is a tour de force which has been achieved through a combination of higher income, lower costs, the reshaping of the business, all while driving growth. The announcement of a further share buyback and upgrades to its guidance leave little for detractors to focus on.

Although the recovery of the Chinese economy is currently faltering, prospects remain many and varied for HSBC, which is part of the reason for the recent outperformance of the share price.

The slowdown in the UK housing market has hit earnings at Travis Perkins, the UK builders’ merchant and home improvement retailer.

Travis Perkins has reported a 31% drop in operating profits in the first six months of this year.

It blames “weak market volumes” in new build housing, and in the private domestic market for renovation, maintenance and improvement, as people cut back at DIY work and home development projects.

Nick Roberts, chief executive officer, says:

“Market conditions have been challenging, which is reflected in both our first half performance and our outlook for the balance of the year.

Roberts adds that near-term trading is expected to remain difficult.

El-Erian warns of real risk of slipping into recession

There is a “real risk” that rising interest rates push the UK economy into recession, warns Mohamed El-Erian, chief economic adviser at Allianz.

El-Erian tells BBC Radio 4’s Today programme that the Bank of England (BoE) risks tipping the economy into recession as it raises borrowing costs to fight inflation.

El-Erian says:

People are feeling the pinch from higher mortgages, companies are feeling the pinch from higher borrowing costs, and global activity is not helping.

So yes there is a real risk that we may slip into recession.

He also predicts that the BoE will raise interest rates at its next meeting on Thursday, and again in September.

El-Erian, who is President of Queens‘ College, Cambridge, warns that raising interest rates risks hurting the economy and the most vulnerable, saying:

I don’t think the Bank of England has much of a choice, given that it has a mission to deliver 2% inflation and we are running at almost four times that level [7.9% in June].

However, if it continues carrying the burden on its own, there will be colateral damage and unintended consequences to economic growth and to the wellbeing of the most vulnerable segments of our society.

House prices: the key charts

These charts from Nationwide show how UK house prices have dropped around 4.5% from their peak last summer, but are still sharply above their pre-pandemic levels.

Nationwide’s July 2023 house price index — Photograph: Nationwide

Knight Frank: Expects prices to fall 5% this year

Estate agent Knight Frank are hopeful that sentiment in the housing market will improve through the rest of this year.

Tom Bill, head of UK residential research at Knight Frank, explains:

“Higher borrowing costs have knocked sentiment and forced buyers to recalculate their budgets but the property market hasn’t slammed on the brakes. The bank rate is nearing its peak, which means that while sentiment will remain subdued, it will only improve in the second half of this year.

That said, prices and sales volumes will come under pressure as the market descends from the highs of the pandemic and adjusts to the new lending environment.

While we expect UK prices to fall by 5% this year, demand should prove more resilient than expected between now and the general election given the cushioning effect of wage growth, high levels of housing equity, lockdown savings, the availability of longer mortgage terms, forbearance from lenders and the popularity of fixed-rate deals in recent years.”

UK house prices were down 3.8% on the year in July, according to latest Nationwide figures. Creeping lower – now down 4.5% from peak in August last year (down more in “real”, after-inflation, terms, of course – and importantly, also relative to wage inflation)

— John Stepek (@John_Stepek) August 1, 2023

Property lenders also warn that affordability is hitting house prices.

Tomer Aboody, director of MT Finance, explains:

‘The declining number of transactions, combined with negativity in the market, is pushing down property prices, a trend which has been evident for several months.

‘The constant interest rate increases are making affordability difficult for buyers, as they try to make moves, with many waiting until some stability comes in.

‘With some better news on inflation recently, it will be interesting to see whether the Bank of England postpones the next rate rise or goes for a slight increase, giving the market some breathing space to adjust.’

Jeremy Leaf, north London estate agent, says the drop in house prices in July is disappointing – but point out that it only covers buyers taking out a mortgage.

Leaf also confirms that the housing market has softened:

’These figures are a little disappointing considering they are reflecting what was happening in the early to middle part of this year when we saw a rebound in sales before mortgage rates rose significantly.

‘However, Nationwide’s data, though comprehensive and widely respected, can only cover activity of its customers and won’t include the cash buyers who have been dominating the market recently, trying to take advantage of more favourable prices.

‘Clearly, the softening that we have seen in recent months in our offices can take up to a year to show itself in the figures so it may be some while yet before marked differences emerge.’

The descent from Aug 22 peak is now 4.5% below, leaving house prices at £260,828 in July 23, as annual house price growth shuffles down -3.8% in July – the weakest outturn since July 2009 @AskNationwide pic.twitter.com/hN8K4sHfMV

— Emma Fildes (@emmafildes) August 1, 2023

Nationwide also point out that expectations for UK interest rates have been “volatile in recent months”.

In mid-May, the markets expected UK interest rates to peak at 5%. But by early July, that had jumped to 6.5% after UK inflation remained much higher than expected.

Today, though, the peak is expected to be 5.75% next spring, up from 5% today.

Nationwide’s Robert Gardner says:

There has been a slight tempering of expectations in recent weeks but longer-term interest rates, which underpin mortgage pricing, remain elevated.

Photograph: Nationwide

This time last year UK house prices were rising at a double-digit pace. Now they’re falling at the fastest rate since the financial crisis.
Nationwide data shows prices dropped 3.8% in the year to July. Biggest fall in house price inflation for 14 years. pic.twitter.com/GJRyOTCu1i

— Ed Conway (@EdConwaySky) August 1, 2023

Nationwide: Affordability should improve once interest rates peak

Nationwide adds that “a relatively soft landing” in the housing market is still achievable, if the economy develops as expected.

Chief economist Robert Gardner explains:

In particular, unemployment is expected to remain low (below 5%), and the vast majority of existing borrowers should be able to weather the impact of higher borrowing costs, given the high proportion on fixed rates, and where affordability testing should ensure that those needing to refinance can afford the higher payments.

While activity is likely to remain subdued in the near term, healthy rates of nominal income growth, together with modestly lower house prices, should help to improve housing affordability over time, especially if mortgage rates moderate once Bank Rate peaks.”