UK house prices still falling at fastest rate since 2009

Introduction: House price growth remained weak in September

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

We start the week with fresh evidence that the UK housing market is weak.

Average UK house prices fell by 5.3% in the year to September, or by around £14,500, a new report from lender Nationwide shows, as high interest rates hit affordability.

That matches the 5.3% drop in August, on Nationwide’s gauge of the housing market, which was the weakest rate since July 2009.

On a monthly basis, price were flat in September on a seasonally adjusted basis, Nationwide reports, with the average house price now £257,808.

Annual & monthly house price growth remains unchanged on Aug, stagnating avg house prices in Sep 23 at £257,808 – down 5.3% year on year (£14,500.) Over Q3 though, all regions recorded price falls that ranged from 1.7% in Northern Ireland to 6.3% in the South West @AskNationwide pic.twitter.com/j66AvqwF1o

— Emma Fildes (@emmafildes) October 2, 2023

Robert Gardner, Nationwide’s Chief Economist, said falling affordability is hitting house prices:

“Housing market activity remains weak, with just 45,400 mortgages approved for house purchase in August, c.30% below the monthly average prevailing in 2019 before the pandemic struck. This relatively subdued picture is not surprising given the more challenging picture for housing affordability.

For example, someone earning an average income and purchasing the typical first-time buyer home with a 20% deposit would spend 38% of their take home pay on their monthly mortgage payment – well above the long-run average of 29%.

But, recent falls in borrowing costs – if sustained – will ease some of the pressure on those remortgaging or looking to buy a home, Gardner adds:

Investors have marked down their expectations for the future path of Bank Rate in recent months amid signs that underlying inflation pressures in the UK economy are finally easing, and with labour market conditions softening.

This in turn has put downward pressure on longer term interest rates which underpin fixed rate mortgage pricing.

A chart showing UK swap rates — Photograph: Nationwide

But although the Bank of England left interest rates on hold last month at 5.25%, mortgages rates are unlikely to return to the historic lows seen in the aftermath of the pandemic.

Gardner explains:

Instead, it appears more likely that a combination of solid income growth together with modestly lower house prices and mortgage rates will gradually improve affordability over time, with housing market activity remaining fairly subdued in the interim.

More details to follow….

Also coming up today

The latest healthchecks on factories in the UK, due this morning, are likely to confirm that activity shrank in September, as early data last month showed.

Purchasing manager surveys from across Europe will probably also show eurozone manufacturing contracted last month.

Stock markets are set to open higher, with investors relieved that a US government shutdown was averted at the last minute over the weekend.

And UK water companies are presenting plans to upgrade their networks to tackle pollution problems, with customers bills to bear the costs.

The agenda

7am BST: Nationwide’s house price index for September
9am BST: Eurozone manufacturing PMI (final reading) for September
9.30am BST: UK manufacturing PMI (final reading) for September
Noon BST: UK water companies to publish five-year business plans to regulator Ofwat
3pm BST: US manufacturing PMI (final reading) for September

Key events

UK mortgage rates have continued to slip away from their recent highs.

Data provider Moneyfacts reports that the average rate on two-year, and five-year fixed home loans slipped a little today.

Here’s the details:

The average 2-year fixed residential mortgage rate today is 6.47%. This is down from an average rate of 6.48% on the previous working day.
The average 5-year fixed residential mortgage rate today is 5.97%. This is down from an average rate of 5.98% on the previous working day.

Eurozone manufacturing sector stuck in deep downturn

In the economic world, the eurozone manufacturing sector remained mired in a deep downturn last month as factory orders plummeted and job losses accelerated.

The latest poll of purchasing managers across the euro area found that the eurozone manufacturing economy continued to contract at a sharp rate at the end of the third quarter.

The latest HCOB PMI data found considerable weakness across the sector, with new orders continuing to shrink at one of the fastest paces since the survey began in 1997.

Firms cut back on job numbers, bought fewer components and less raw materials, and also ran down their inventories, even though input costs fell sharply yet again.

This pulled the HCOB eurozone manufacturing PMI down to 43.4, from August’s 43.5, which shows a sharper contraction.

Germany’s factory sector suffered a faster drop in activity, with output there falling at the fastest rate in almost three-and-a-half years.

One in four new UK homeowners opt for ‘marathon mortgages’ to cut payments

Mark Sweney

A quarter of young homeowners who have a new mortgage have opted to pay it back over 35 years or more in an attempt to make monthly payments more affordable, according to Experian this morning.

Analysis by the credit data company found that 25% of new homeowners aged 29 and under between January and March this year had opted for a repayment term of at least 35 years.

This compares with the historical typical level of about 10%, which Experian recorded in January 2020.

First-time buyers and movers are increasingly opting for “marathon” mortgages – with lenders offering terms of as long as 40 years on some deals – for lower monthly payments in an effort to bridge the gap between rising living costs and still-high asking prices.

More here:

BBC: Sharon White to step down at John Lewis

The BBC’s Simon Jack is reporting that Sharon White plans to stand down as chair of the John Lewis Partnership, when her current term ends in 2024:

1/ Scoop. Dame Sharon White to stand down as Chair of John Lewis Partenership. She has initiated talks with the board of the John Lewis Partnership to appoint her successor.

The Chair of JLP serves 5 yr terms. Sharon White’s term ends next year and she will not seek a second..

— Simon Jack (@BBCSimonJack) October 2, 2023

2/ People familiar with the matter say that she is leaving at a moment when she considers the worst of the cost of living crisis to be over and now is the time to seek an orderly succession.

— Simon Jack (@BBCSimonJack) October 2, 2023

White, the former CEO of communications regulator Ofcom, has had a tough time at John Lewis – staff were critical of the group’s performance earlier this year, and last month it admitted its turnaround plan will take two years longer than scheduled.

She has also been mentioned as a possible candidate for a peerage should Labour win the next election:

In New Statesman, Kevin Maguire tips peerages of PM Starmer:
Iain Anderson, Margaret Beckett, Luciana Berger, Mark Drakeford, Michael Dugher, David Evans, Harriet Harman,
Margaret Hodge, George Howarth, Ivan Lewis, Gary Lineker, Deborah Mattinson, Feargal Sharkey & Sharon White.

— @Tomorrow’sMPs (@tomorrowsmps) September 26, 2023

Julian Jessop, economics fellow at right-wing thinktank the IEA, predicts house prices have further to fall:

A 5% fall just doesn’t seem enough…#Mortgage rates are still much higher, and simple measures of affordability (such as #house prices/earnings 👇) are still stretched.

I therefore continue to expect a peak-to-trough decline of at least 10%.

nb. not financial advice!

(2/2) pic.twitter.com/zh3EEMgPrv

— Julian Jessop (@julianHjessop) October 2, 2023

In the last quarter, flats saw the largest year-on-year fall (-5.7%), compared to -3.6% for detached gomes, -4.6% for semi-detached and -5.3% for terraced properties, Nationwide reports.

That’s despite transaction volumes for flats holding up better than other property types.

This map shows how all UK regions recorded annual house price falls in the third quarter of this year:

Photograph: Nationwide

Tom Bill, head of UK residential research at Knight Frank, predicts house prices will start to rise on an annual basis after the next general election (which has to take place by the end of January 2025).

“Fourteen consecutive rate rises have taken their toll on the property market but more stable lending conditions means buyers and sellers will be able to catch their breath.

The number of people rolling off more favourable fixed-rate mortgages won’t fall in 2024, but sentiment should improve as volatility reduces. We think most of the UK’s house price correction will happen this year and modest single-digit annual growth will return after the next general election.”

Anna Clare Harper, CEO of sustainable investment adviser GreenResi, agrees that a full house price crash is unlikely, saying:

‘Softer pricing is unsurprising as higher interest rates have a much larger impact on affordability than asking prices. Last year’s pricing levels, which were buoyed up artificially by policies such as the stamp duty holiday and very low interest rates, are no longer achievable.

‘However, unlike commercial property such as offices, which in many cases have fallen in value by 20-30%, it’s unlikely that we experience a full house price crash. Firstly, this is due to the ‘necessity’ of housing. We all need a roof over our heads. Secondly, a large proportion of the market are owned outright, and they are unaffected by mortgage interest rates. For this reason, fears of a ‘house price crash’ are unrealistic.

‘The challenge is less around house prices and more around the shortage of rental homes, which are in ever greater demand due to reduced affordability of buying a home. The relative stability of house prices combined with a growing supply shortage in rental is encouraging new institutional investment, and this is essential for ‘Generation Rent’.’

EY ITEM Club: UK housing market is middle of a soft landing

The UK housing market is in the midst of a soft landing rather than a serious correction, predicts the EY ITEM Club group of economic forecasters.

They expect house prices to decline over the rest of this year and into 2024, with prices eventually around 10% below their record peak last year.

Martin Beck, chief economic advisor to the EY ITEM Club, says:

“What had been a downward trend in the Nationwide measure of house prices saw some relief in September. Average values held steady, following August’s 0.7% decline. But this left prices in Q3 still 3.1% down on the previous quarter, the fourth consecutive quarterly fall.

“Alongside mortgage approvals and mortgage lending remaining at low levels over the summer, weakness in house prices is another sign of the effect of the substantial rise in mortgage rates over the last 18 months or so. And with that effect still filtering through the economy, the EY ITEM Club thinks that, monthly volatility aside, house prices will likely drift down further.

“However, the outlook for the housing market has improved in one important respect. The Bank of England’s decision to pause interest rate rises in its last meeting means the current rate rise cycle has likely peaked at a level much lower than many expected only a few months ago.

Although price fell by over 5% over the last year, September’s house price data is stronger than expected.

Victoria Scholar, head of investment at interactive investor, explains

“UK Nationwide house prices came in unchanged month-on-month in September, outpacing expectations for a drop of 0.4% and improving from a drop of 0.8% in August.

Year-on-year they fell by 5.3%, a slightly smaller drop than analysts’ forecasts for a decline of 5.7% but still the biggest annual drop since 2009, matching August’s reading. All regions suffered annual house price falls in the third quarter but the South West was the weakest performing region with prices down 6.3% year-on-year. The average house price now stands at £257,808.

The housing market is under pressure as rising borrowing rates weighing on mortgage approvals and monthly mortgage payments rise sharply as a percentage of average income. However with the Bank of England at or close to the peak of the rate hiking cycle, inflation coming down and house prices cooling, some pressures for potential homeowners could ease in the months ahead. Nonetheless the era of cheap mortgage rates is now just a distant memory with the housing market having to recalibrate to reflect the shift towards higher for longer interest rates.”

In one line, the UK housing market is “close to bottoming out.”

That’s the verdict from Samuel Tombs, chief UK economist at Pantheon Macroeconomics, on today’s housing data from Nationwide.

He explains:

Nationwide’s house price index remains on a downward trend—September’s unchanged reading followed August’s hefty 0.8% month-to-month decline—due to the severe blow to affordability from higher mortgage rates.

Nationwide calculates that the proportion of first time buyers’ take-home pay absorbed by monthly mortgage payments has soared to 38%, from a 20-year low of 27% in Q3 2020, and now is well above its 1985-to-present average, 29%.

Nonetheless, affordability should begin to improve over the coming months, as mortgage rates respond to the recent decline in expectations for Bank Rate, and as wages continue to rise, albeit not at their recent frenetic pace. The recent recovery in consumers’ confidence—GfK’s measure of consumers’ expectations for their personal finances over the next 12-months was only a smidgen below its 40-year average in September—suggests that demand also might start to firm up.

The pick-up in rents also will increase the share of income that FTBs are willing to devote to housing. Accordingly, the downturn in house prices probably has only a few months left to run.

We continue to look for a 6% peak-to-trough decline in the official measure of house prices, with the nadir coming in Q1.

A chart of UK house prices Photograph: Pantheon Economics

Annual house price growth in the North vs the South Photograph: Nationwide

South West England was the weakest performing region, with house prices down 6.3% year on year in the last quarter.

But the smaller annual fall was recorded in Northern Ireland, where prices are 1.8% lower than a year ago.

A chart showing regional house price changes in September 20234 Photograph: Nationwide

In Wales, prices fell 5.4% per year in the July-September quarter, down from a 1.4% fall in April-June.

In Scotland, price falls also accelerated – to -4.2%, from -1.5% in Q2.

Nationwide’s Robert Gardner adds:

“Across northern England (which comprises North, North West, Yorkshire & The Humber, East Midlands and West Midlands), prices were down 3.9% compared with Q3 2022.

The North was the strongest performing northern region, with the annual rate of change improving from -3.3% to -2.0%, while the East Midlands was the weakest, with a 5.5% decline.