House Price Decline is "Closer to the Beginning than the End" - Economists React to Nationwide House Price Data

Image courtesy of Nationwide.

UK house prices have fallen at their sharpest pace since 2012 according to one of the UK's most comprehensive measures of house prices and economists say further falls are coming.

Nationwide said their House Price Index revealed a 0.5% month-on-month fall in February, taking prices 3.7% lower than the August 2022 peak.

House prices are now down 1.1% year-on-year in February, making for the first annual decline since June 2020 and the weakest since November 2012.

"It is clear that higher rates are weighing on demand for mortgages, as well as property," says Michael Hewson, Chief Market Analyst at CMC Markets, the online broker.

Economists at Nationwide say the decline in house prices is due to falling living standards owing to decades-high inflation and elevated mortgage prices.

Robert Gardner, Nationwide's Chief Economist, says it will be hard for the market to regain much momentum in the near term since economic headwinds look set to remain relatively strong.

Image courtesy of Nationwide.

Despite the recent fall in prices, by historical standards the cost of buying a house in the UK remains elevated, making it difficult for first-time buyers to enter the market.

"For a prospective first-time buyer earning the average income looking to buy the typical home, mortgage payments remain well above the long-run average as a share of take-home pay," says Gardner.

The Nationwide report follows one from RICS that shows an ongoing collapse in demand for new houses.

Andrew Wishart, Senior Property Economist at Capital Economics says the level of house prices in February and the average quoted mortgage rate of 5.0% in January, leaves the monthly cost of a new mortgage at 53% of the median disposable salary, which is well above the long-run average of 41%.

"The recent rise in market interest rates will prevent a further fall in mortgage rates in the near term and means that we are closer to the beginning of this price correction than the end. Our forecast s that nominal prices will fall by a further 8% on top of the 4% seen to date," says Wishart.

Image courtesy of Nationwide.

Gabriella Dickens, Senior UK Economist at Pantheon Macroeconomics, says house prices will fall over the coming months until they are about 8% below their peak.

"Mortgage rates appear to have hit a floor for now, and households’ real disposable incomes will be squeezed again in April by the withdrawal of energy price subsidies by the government," she says in reaction to the Nationwide numbers.

Pantheon Macroeconomics notes expectations among the public that house prices will fall sharply are well-entrenched, with 62% of households expecting house prices to drop by at least 5% over the next year.

But by 2024 house prices should be recovering again.

"Demand won’t recover until a significant drop has materialised. We have tentatively pencilled in a 5% rise in house prices for 2024, however, reflecting our view that the MPC will start to reduce interest rates next year," says Dickens.

Nationwide's Gardner also sees some stability returning in later months.

"Conditions should gradually improve if inflation moderates in the coming months as expected, easing pressure on household budgets. Solid gains in nominal incomes together with weak or declining house prices will also support housing affordability, especially if mortgage rates edge lower in the coming month," he says.

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