UK Home Price Declines Quicken as Mortgage Rates Darken Outlook

Lucy White
·4 min read

(Bloomberg) -- The decline in UK house prices accelerated in June, according to the Nationwide Building Society, fueling concerns about the impact of soaring mortgage rates on borrowers.

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The year-on-year pace of declines ticked higher to 3.5%, the lender said in its monthly price index. That compared with a drop of 3.4% in May, which was already the most since 2009.

Read More: UK Households Pay Down Mortgage Debt and Raid Savings

The housing market gloom is another source of concern for Prime Minister Rishi Sunak as he gears up for a general election expected in 2024. The ruling Conservative Party is trailing by double digits in opinion polls behind the Labour opposition, which has denounced rising borrowing costs as a “Tory mortgage penalty.”

The average home price fell to £262,239 ($331,000), down 4% from its peak last August, but still well above pre-pandemic levels.

Borrowers are facing a steep rise in mortgage costs, as the Bank of England ratchets up interest rates to counter surprisingly resilient inflation. Investors expect the central bank will be forced to bump up the rate above 6%.

Read More: BOE’s Bailey Hints Rates May Be Higher for Longer Than Expected

On a monthly basis, house prices unexpectedly rose 0.1% between May and June after a 0.1% fall a month earlier, compared with a slide of 0.2% expected by economists surveyed by Bloomberg. Economists however said this uptick was unlikely to be sustained, since much of June’s activity will have come before the BOE raised its base rate 50 basis points last week to 5%.

“The sharp increase in borrowing costs is likely to exert a significant drag on housing-market activity in the near term,” Nationwide chief economist Robert Gardner said. “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.”

Mortgage rates shot up in the aftermath of former Prime Minister Liz Truss’s unfunded spending plans last September, as markets bet that the government would have to ramp up its borrowing. Although that specific impact has since subsided, it has been balanced out by the BOE’s rate hikes.

While prices falls have so far undershot the 10% plunge that many economists expected this year, the BOE’s moves are increasing the pressure on the market. Andrew Wishart, senior property economist at Capital Economics, said it was “just a matter of time before the spike in mortgage rates in recent weeks causes a new leg down in prices.”

Martin Beck, chief economic adviser to consulting firm the EY ITEM Club, doubted that June’s “surprisingly resilient” prices would continue. “The reaction of financial markets to a series of upside surprises for inflation and pay growth has caused interest-rate expectations to climb,” Beck said.

Still, market expectations of a 6.25% peak in base rate were “too pessimistic,” he said. “Mortgage rates should fall back during the second half of this year, albeit to levels still high by the standards of the last decade or so.”

Figures from the BOE on Thursday showed households collectively paid back almost £100 million more in mortgage debt than they borrowed in May, making net repayments for a second month in a row. This was the first back-to-back reduction in secured lending in records going back to 1993.

Read More: London Home Asking Prices Slide as Rate Rises Stretch Buyers

And while mortgage approvals — an indicator of future borrowing — rose slightly to 50,524, they remained well below pre-pandemic levels, indicating that rising rates are piling pressure on would-be buyers. The effective interest rate on new mortgages rose 10 basis points to 4.56% in May, the BOE said.

Speaking at a media round-table event on Thursday, Blackrock managing director Alex Brazier — the BOE’s former executive director of financial stability — said he expected that bringing inflation down to 2% would “in all likelihood” necessitate a recession.

A large chunk of the BOE’s tightening since December 2021 has yet to work its way through to households due to the higher number now on fixed-rate mortgages.

Around 400,000 borrowers are due to refinance each quarter in the years ahead as their deals come to an end, according to Nationwide’s Gardner. That’s equivalent to about 20% of the fixed-rate mortgage stock refinancing by the end of 2023, and 40% by the end of 2024.

Still, increased stress tests in recent years may mean borrowers are able to cope.

“Incomes have been rising at a solid pace in recent years,” Gardner said. “Lenders will also work with borrowers to provide assistance wherever possible.”

--With assistance from Andrew Atkinson.

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