Demand remained subdued as elevated mortgage rates weigh on prices
House prices slipped by -0.2% in July, bringing annual falls to -3.8%, according to Nationwide. It is worth noting that home values were close to their peak last July, hence the sizeable annual adjustment. While the monthly fall was modest, we expect a continued downward trajectory as high mortgage rates suppress the market.
There is significant variation behind this national figure. Blaenau Gwent performed strongest, with annual growth to April of 13.1%. Aberdeen has continued to fall (down -1.6% annually) and has now been joined by the London boroughs of Southwark (-1.6%), Hammersmith and Fulham (-1.1%), Brent (-1.0%), and Hackney(-0.8%), as high mortgage rates put increased pressure especially on areas of stretched affordability.
Activity has remained more robust, as the number of completions rose in June to 94,690, according to HMRC. This was 86% of their 2017-19 average, up from 77% in May, as a rise in mortgage approvals in the early part of the year translated into completions.
An increasing number of surveyors reported both decreasing supply and demand, according to the RICS June survey. The gap between supply and demand widened, which will suppress values.
Low numbers of mortgage approvals also indicate reduced demand, with the number of mortgage approvals in June at just 85% of the pre-covid average, according to the Bank of England. This was accompanied by a fall in the number of sales agreed to 87% of their pre-covid average in June from 97% in May, according to TwentyCI.
Continued high mortgage rates are suppressing activity, although we are now likely near the peak in rates. On 3rd August the Bank of England (BoE) raised the base rate by 0.25%. Oxford Economics expect the base rate to peak at 5.50% by the end of 2023 as the BoE prioritises combating inflation.
Most lenders have priced in a base rate of this magnitude, and there was little movement in quoted rates following the hike on the 3rd. We don’t anticipate significant movement unless inflation surprises on the upside, which would force further action from the BoE.
Inflation is trending down at last, falling to 7.9% in June, down from 8.7% in May, according to the ONS. This was a slightly larger drop than many economists had predicted, but it’s important to be wary of a single month of data.
Annual rental growth across the UK remained high at 10.4% in June, up 0.1% compared to May. Rental growth accelerated across all regions except Yorks & Humber and Wales on a month-on-month basis. The North West had the biggest growth in June, up 1.2%, according to Zoopla, bringing its post-pandemic growth since March 2020 to 27.9%. This was above the UK average of 23.8%.