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UK housing market: Economy perking up?
The UK housing market is showing signs of stabilisation, reflecting rising demand amid lower interest rates. Meanwhile rental inflation might be starting to soften as the gap between rental demand and supply narrows. A less pronounced-than-feared mortgage squeeze and easing rent inflation could help boost household income this year.
Perking up?
Another month, another set of indicators pointing to a stabilisation in the UK housing market. On pricing, while our preferred Nationwide index was flat in December, the Halifax measure posted another month of solid growth. ‘Soft’ house price indicators also point to stabilisation, or even the resumption of growth, in house prices: the main RICS house price index rose sharply again in December, from -41 to -30, Rightmove asking prices rose in January, and the RICS survey for expected house prices in 12 months’ time has returned to positive territory (just) for the first time since August 2022.
This stabilisation in prices appears to reflect rising demand, albeit from a low base. Mortgage approvals rose back above 50k in November, and have returned to growth on a year-on-year basis, while the RICS index for buyer enquiries is recovering fast.
This time has been different
If the house price stabilisation sticks (our central case is for flat house prices this year), that would reflect a remarkably mild correction compared to previous downturns. That is certainly the case in terms of nominal house prices but, despite high recent inflation it is also the case in terms of real house prices. Unlike after the Global Financial crisis or the early 1990s, we have not seen a credit crunch and the labour market has remained robust. And while higher mortgage rates (on mortgages which are much bigger than in the 1990s) have been a significant headwind, we could be past the worst on that front.
Mortgage rates are falling (for now)
Indeed, mortgage rates have been falling. Having risen to around 6% last summer, rates on typical 5-year mortgages are still falling and are now quoted below 4% (This is Money, 17 January). Not only does this reduce the hit to households as they re-fix their mortgages, it might also be starting to underpin the recent recovery in demand.
That said, we do think that market expectations for policy rates, which underpin mortgage pricing, have been somewhat too dovish for some time. Those expectations appear to have moved past peak-dovishness so far this year, and swap rates have edged up. So we might see the local trough in mortgage rates coming soon.