Have We Reached the Tipping Point for UK House Prices?
We’re going to be getting plenty of house price data in the next few days — we get Nationwide house prices for June on Friday, and data on mortgage approvals tomorrow — so I’ll be coming back to this topic later in the week.
But today I wanted to highlight a couple of interesting data points. First, there’s the latest data from property website Zoopla Ltd.
For May, Zoopla reckons that house prices are up 1.2% on the year, which is basically in line with the other house price indices, and down from 1.9% annualised growth in April. What’s probably more interesting is the data on supply and discounting.
The proportion of sellers accepting a 5% discount on their asking price has risen from a year-to-date average of 35% to 42%. Meanwhile the proportion taking a 10% hit is sitting at around 15%.
Mortgage rates at 5% represent “a tipping point for annual price falls and lower sales,” says Zoopla. While the company currently expects prices to fall by 5% over 2023, there is “further downside risk if we see an acceleration on supply of homes for sale that boosts choice and further room for negotiation.”
That seems quite possible. The number of homes hitting the market in May was 18% higher than the five-year average, while the number of buyers fell by 14% compared to the average.
Finally, however, we’re getting a sense of where rising mortgage rates are really biting the hardest. Unsurprisingly, it’s where houses are the most expensive — for example, prices in London (average price nearly £525,000) are now falling by Zoopla’s reckoning, down 0.2% on the year. Cambridge (average price around £465,000) saw a 0.2% drop too.
Physical Supply Versus Maxed-Out Mortgages
This ties into an interesting piece of research by Danny Walker at the Bank of England, published on the Bank’s blog. Walker argues that rising rates don’t affect all areas equally. He says that the main differentiator is the ease of building more homes — the more responsive physical supply is to demand, the less sensitive individual markets are to rate changes.
However, I’m not entirely sure the causation is correct here. As Neal Hudson, analyst at BuiltPlace, pointed out, the places that are most sensitive to interest rate changes are those where people already had to borrow to the hilt to get a foothold in the market.
It may well be that physical housing supply is more responsive to demand in, say, Northumberland, but I suspect that in fact, persistently higher demand means that a) London (relative to eg Northumberland) has exhausted the low-hanging fruit in terms of building under current regulations; and b) potential buyers there are always maxed out in terms of borrowing and so have no extra “give” if interest rates go up.
Anyway, as Hudson also points out, the end result is pretty much the same — rising rates hit the likes of London and other expensive areas harder than cheaper areas.
One way or another, I’d be surprised if house prices don’t continue to decline. The main thing that will differentiate between a healthy correction and a crash is whether we get job losses or not. I’m still hopeful that we can avoid a serious increase in unemployment.
But a “mistake” by the Bank of England’s Monetary Policy Committee certainly can’t be ruled out, particularly given its ropey track record thus far. For more on why the Bank might now want to tread carefully, see the “Chart of the Day” below.
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What I’ve been reading this morning
- If you haven’t listened to Merryn and I talking central bank-backed digital currencies (CBDCs) with Bloomberg crypto reporter Emily Nicolle, then tune in here.
- How is university education funded across the world? This is an interesting Bloomberg comparison of funding models, written in light of current US discussions about debt forgiveness.
- Gold has become just another cyclical asset, says Tyler Cowen. Not sure I agree with him, but never let it be said that we don’t allow dissenting voices in the Money Distilled inbox.
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Mid-day markets
Looking at wider markets — the FTSE 100 is up today by around 0.6% to just above 7,500. Gold is down around 0.3% to just above $1,900 an ounce, while oil (as measured by Brent crude) is down slightly at about $72 a barrel. The pound, meanwhile, is down around 0.7% against the US dollar at $1.266.
Follow UK Markets Today for up-to-the-minute news and analysis that move markets.
Chart of the day… revisiting energy and inflation
I was fiddling around with the Bloomberg terminal yesterday evening, as you do, and I thought I’d compare energy components from the various consumer price indices across some of the bigger economies. (Yes I do have an amazing social life, thank you for asking). This chart might shed a bit of light as to why the UK is such an apparent outlier on inflation.
Read More @ Bloomberg