Sunday, April 09, 2023
Housing's still adjusting to the interest rate shock
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

It is Easter, and plenty of people’s thoughts turn to the housing market about now. This is traditionally the time of the spring awakening, when sellers who have had their properties up for sale over the winter can hope for at least a few nibbles and when the supplements are full of helpful advice.

Reading the housing market now is more difficult than usual, for reasons that will shortly become clear. The year began with plenty of predictions of big house prices falls, alongside much lower transactions after the Covid recovery years of 2021 and 2022.

This matters, and beyond just the housing market. Rising house prices, while raising the barrier for first-time buyers, have a wealth effect which lifts consumer spending. Increases in housing transactions also fuel spending; when people move, they also tend to improve the property they have bought. Skips are hired and carpets replaced, even kitchens.

The difficulty of reading the market is underlined by the contrasting fortunes of two closely watched house prices measures. The Nationwide, Britain’s biggest building society, said recently that house prices fell for a seventh consecutive month in March, dropping by 0.8 per cent, and are now 3.1 per cent down on a year earlier, and 4.6 per cent below their peak last August.

The Halifax, another major mortgage lender, offered a very different view in its latest house price reading on Thursday. It put the cat among the pigeons by saying that prices rose by 0.8 per cent last month, after a in what it described as a show of resilience and were 1.6 per cent up on a year earlier, though 0.4 per cent down in the latest three months.

The one thing both indices can agree on is that prices have fallen from their peak in August last year, when they were still benefiting from the most unusual boom in history, the one that unfolded during the pandemic. In Halifax’s case though prices are only 2 per cent below that peak. The official house price index, produced by the Office for National Statistics, is also down from the peak, though so far only by 1.8 per cent.

Short-term differences between the Nationwide and Halifax measures are not unusual, reflecting different samples and methodology, but they do not change the big picture.

Everybody can agree that the housing market suffered a huge, confidence-sapping shock last autumn, with the Kwasi Kwarteng-Liz Truss mini budget on September 23 last year. My keyboard wants to put the word “disastrous” in front of mini budget in that sentence but there is no need to rub it in any more.

That shock, with hundreds of mortgage products rapidly withdrawn and replaced with new ones at significantly higher rates, and money market expectations for official interest rates rising sharply, was deeply felt, particularly among potential buyers.

This, more than anything, underlined the fact that the low interest era had come to an end. People who had got used to borrowing at very low mortgage rates now faced a very different picture.

Low mortgage rates, on the back of near-zero official interest rates, had kept house purchase affordable even as a traditional measure of affordability, the house price-earnings ratio, had risen to ever higher levels. The shift to higher interest rates, which was dramatic, fundamentally changed that equation.

As recorded by the Halifax, the impact on prices was immediate and sharp, with a fall of nearly 4 per cent in November and December of last year combined. On the Nationwide measure, the immediate effect was smaller, and the follow-through has continued this year.

The question now is whether the market is getting over that shock and recovering its composure, as implied by the Halifax data on prices, or whether the adjustment has further to run.

Indicators that reflect what was happening late last year still paint a downbeat picture. Thus, housing transactions in February, as measured by HMRC, were 18 per cent lower than a year earlier and 4 per cent down on January.

But mortgage approvals, which by their nature are forward-looking, showed their first monthly recovery in February since August last year, according to the Bank of England, though were only about two-thirdS of “normal” pre-pandemic levels.

A range of forward-looking indicators produced by Zoopla, the property website, suggests that the market is picking up after last year’s shock. Buyer demand – people contacting estate agents about specific properties – is higher but remains below its five-year average. Sales agreed, however, are slightly above the five-year average, though Zoopla also notes that an “unseasonably high” proportion of properties on agents’ books have a price reduction of 5 per cent or more.

The house-building sector, meanwhile, has emerged as a drag on the wider construction industry, having boosted it during the pandemic boom. The latest purchasing managers’ index for construction, published last week, showed that housing activity “decreased at a sharp and accelerated pace in March”.
“The rate of decline was the fastest since May 2020,” S & P Global, which compiles the survey, noted, “with survey respondents often citing fewer tender opportunities due to rising borrowing costs and a subsequent slowdown in new house building projects”.

Adding all this up points to a housing market that is getting over the worst of last autumn’s shock but is not yet out of the woods. The Bank’s interest rate hikes will continue to act as a dampener, as will official forecasts of a rise in unemployment, if realised.

Against this, mortgage rates have continued to edge lower. Rightmove’s mortgage tracker suggests an average rate for a five-year fixed mortgage with 60 per cent loan to value of 4.28 per cent, or 4.84 per cent for 90 per cent loan to value. These rates have moved lower in recent weeks, have those for two-year fixed rates, but reman significantly higher than a year ago, when the averages were 2.19 per cent and 2.78 per cent respectively.

For that reason, the adjustment to a higher interest rate regime is probably not yet over. A house price crash is unlikely but, notwithstanding the Halifax, they are likely to remain flat or soft for some months to come.

Not too many people will begrudge that. On the Nationwide measure, the average UK house price rose by almost 27 per cent between February 2020, the start of the pandemic, and August last year. The fall in prices since then has only taken back a small proportion of that rise.

And, as its chief economist Robert Gardner puts it: “It will be hard for the market to regain much momentum in the near term since consumer confidence remains weak and household budgets remain under pressure from high inflation. Housing affordability also remains stretched, where mortgage rates remain well above the lows prevailing at this point last year.”

The change in the outlook for prices, alongside reasonably robust growth in earnings, should improve affordability. And that is a good thing.