Another house price fall - is forced selling on the horizon?

December saw a further sharp slowdown in annual house price growth to 2.8 per cent from 4.4 per cent in November according to the Nationwide.

Prices fell by 0.1 per cent month-on-month – a much smaller decline than in the previous couple of months. However, December also marked the fourth consecutive monthly price fall - the worst run since 2008.

Prices are now 2.5 per cent lower than their August peak after taking account of seasonal effects.

Nationwide chief economist Robert Gardner says the fall is down to a weakness in mortgage applications in the autumn. 

“With the chaotic backdrop and elevated mortgage rates in recent months, it wouldn’t be surprising if potential buyers have opted to wait until the New Year to see how mortgage rates evolve before deciding to step into the market.

“Longer-term interest rates, which underpin mortgage pricing, have returned towards the levels prevailing before the mini-Budget. 

“If sustained, this should feed through to mortgage rates and help improve the affordability position for potential buyers, as will solid rates of income growth (with wage growth currently running at a circa seven per cent pace in the private sector), especially if combined with weak or negative house price growth.

“But the main factor that would help achieve a relatively soft landing (especially for house prices) is if forced selling can be avoided, and there are good reasons to be optimistic on that front. Most forecasters expect the unemployment rate to rise towards five per cent in the years ahead – a significant increase, but this would still be low by historic standards.

“Moreover, household balance sheets remain in good shape with significant protection from higher borrowing costs, at least for a period, with around 85 per cent of mortgage balances on fixed interest rates. 

“Affordability testing has been central to mortgage lending since the financial crisis and typically stress tested at an interest rate above those prevailing at the moment. This means that, while it will be difficult, the vast majority of those refinancing should be able to cope.

“The fact that the housing market remained buoyant in the first three quarters of 2022, despite weak consumer confidence on the back of a stagnant economy, falling real incomes and a near tripling of mortgage rates, provides some reassurance that there will be a pickup in activity in the New Year, although it is likely to remain tepid until the broader economic outlook improves.

“Similarly, while house prices are likely to see a modest decline in 2023 (perhaps of circa five per cent) a significant deterioration in the labour market or more elevated mortgage rates would probably be required to generate the double-digit declines suggested by some forecasters. While the risks are skewed in that direction, it doesn’t appear to be the most likely outcome.”

In response to the new figures Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “As expected at this time of year, activity in the housing market has slowed with average prices falling month-on-month, although by a smaller amount than in November. Higher mortgage costs, along with the rising cost of living, are having an inevitable impact on affordability.

“The swap rate volatility sparked by the the mini-Budget has largely dissipated and mortgage rates have settled on the back of this. 

“Lenders continue to chip away at the pricing of their fixed-rate mortgages but even so, there are still many people coming off fixes who are in for a payment shock. We expect lenders to come to market with more attractive pricing in January as they start from scratch in terms of building their business for the new year.

’Further interest rate rises are on the cards in the coming year as the Bank of England continues in its efforts to bring inflation under control. However, a lower peak in rates than previously thought may be sufficient, making life easier for borrowers.”

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