According to Nationwide’s house price review, which looks back over the year then shares expectations for 2023, found that in the first three quarters of the year the housing market was “remarkably resilient”.
It noted that for much of 2022, activity levels were at or above pre-Covid levels with annual house price growth in double digits for the first eight months of the year. This ranged between 10 per cent to 14.3 per cent.
This is despite “intense pressure on household finances from surging inflation and a steady rise in mortgage interest rates”.
The report added that between January and August the average UK house price rose by almost £20,000 from £255,556 to £273,751.
Robert Gardner, Nationwide Building Society’s chief economist, said that the performance was “all the more surprising” as housing affordability was “already stretched in a number of important respects”.
He pointed to deposit requirements which he said had become “onerous” as a result of house prices outstripping earnings by a “wide margin in recent years”.
Gardner said that a 10 per cent deposit on a typical mortgage for a first-time buyer property grew to almost 60 per cent of annual gross earnings, which he noted was an all-time high.
Mini Budget was ‘major shock’ to housing market
Gardner said that the financial market turbulence after the mini Budget was a “major shock to the housing market”.
He continued that the number of mortgage applications had slumped near the lows seen at the start of the pandemic as the sharp increase in long-term interest rates fed through to mortgage rate and “fundamentally changed the affordability dynamic for prospective buyers”.
Garnder said that as mortgage rates moved towards six per cent, the monthly mortgage payment on a typical first-time buyer property purchased with a 20 per cent deposit rose to the equal of 45 per cent an average worker’s take-home pay.
He said that this was close to levels prevailing in 2007 prior to the financial crisis and up from close to 30 per cent earlier in 2022. Gardner noted that the latter was “close to the long run average”.
“Financial market conditions have now settled with long-term interest rates returning to the levels prevailing before the mini Budget. However, mortgage rates are taking longer to normalise and activity levels in the housing market have shown few signs of recovery with house prices seeing three successive monthly declines since September – the worst run since 2008,” Gardner warned.
Economic headwinds to strengthen but ‘relatively soft landing’ can be achieved
Gardner thought that the weakness could reflect an “early start to the usual seasonal slowdown” as buyers could wait until next year so see how mortgage rates change before proceeding.
However, he warned that it would be hard for the market to “regain such momentum” as “economic headwinds set to strengthen”. He pointed to real earnings continuing to fall, further interest rate rises and a weakening labour market.
“The risks are skewed to the downside, but there is still a good chance that we can achieve a relatively soft landing next year with activity stabilising modestly below pre-pandemic levels and house prices edging lower, perhaps by around five per cent,” Gardner noted.
He continued that the Bank of England was likely to raise interest rates further, but as most borrowers had opted for fixed rate mortgages linked to long-term interest rates, which had already peaked, this would “provide some support to affordability”.
Gardner added that affordability would also be bolstered by “solid gains in nominal earnings growth and modestly lower house prices”.
He also said that while the labour market was expected to soften, the deterioration would be “modest”.
“Many forecasters, including us, expect the unemployment rate to rise to around five per cent in the years ahead – this would represent a significant rise from the current rate of 3.7 per cent, but would still be low by historic standards.
“Moreover, household balance sheets remain in good shape with significant protection from higher borrowing costs, at least for a period, with around 85 per cent of mortgage balances on fixed interest rates,” he concluded.
