The Bloomberg Intelligence UK Housing Pulse report for August said house prices would decline by a moderate five per cent this year and the drop in demand would impact completions in 2023 and 2024.
However, slowing inflation and a softening labour market could limit the Bank of England’s base rate increases, which Bloomberg said would lead to reduced mortgage rates that would “contain market damage”.
Iwona Hovenko, real estate analyst at Bloomberg Intelligence, said: “Elevated mortgage rates may continue to pressure UK house prices in Q4, with moderate declines likely, possibly leading to a five per cent fall in 2023, in line with BI’s prior view. We expect the slowdown to be more visible in subdued transactions, evident in weak leading indicators such as mortgage approvals, homebuilders’ orders, the RICS sentiment survey and property portal data.
“First-time buyer demand has plummeted, but some wannabe homeowners are still determined to escape the competitive rental market and fast-rising rents. Cash buyer demand has been the most resilient.”
The base rate is now expected to peak at 5.5 per cent, instead of the initially projected 6.4 per cent.
Hovenko said: “Once inflation starts easing more markedly, mortgage-rate declines could resume before any central bank cuts, offering respite to the residential-property segment. Tentative signs of abating price strain and a softening labour market – the unemployment rate climbed to 4.3 per cent in July from the August 2022 low of 3.5 per cent, even as wage growth remained at 7.8 per cent – might support some pullback in rate views, driving mortgage rates lower.
“That may, however, require several months of consistently slowing inflation and wage pressure.”
Mortgage rates still too high
Bloomberg said although average mortgage rates had started to fall in recent weeks, “financing expenses are still very high and pose a risk to housing activity and prices”.
The firm said rates were at their highest for over a decade which added pressure to the UK housing market.
It said improved affordability could ease this pressure.
Hovenko added: “The UK housing outlook is still negative for transactions and house prices in Q4 – given mortgage rates remain firmly above five per cent across all loan-to-value ratios – but any easing of rates could help avoid the most severe scenarios. That comes as moderate house-value declines, combined with solid annual wage growth of 7.8 per cent in July, potentially improve affordability.
“Even though buyers may not yet feel this effect – since high interest rates reduce how much they can borrow – a substantial decrease in mortgage rates might make the benefit more pronounced. That said, we don’t expect a significant rate fall to materialize in 2023, with the general election posing a threat to housing activity. A modest pre-election housing boost might be possible.”
