Market outlook uncertain, warns chief economist

Nationwide's chief economist responds to market drop

Market outlook uncertain, warns chief economist

The housing market’s outlook remains extremely uncertain amid the first drop in house prices in more than a year, according to Nationwide’s chief economist, Robert Gardner.

Speaking to Mortgage Introducer, Gardner said: “The economy is going to face a challenging period in the next few quarters. We've seen consumer confidence fall to lowest levels on record…affordability has become more stretched through time, partly because house prices have been piercing income growth by a wide margin over the last couple of years, and also because borrowing costs have also been increasing as well. All those things suggest that demand is likely to soften in terms of the supply side.”

The monthly drop was widely attributed to the Truss government’s mini budget over a month ago, which wreaked havoc on the housing sector, as mortgage interest rates skyrocketed and hundreds of products were withdrawn.

Read more: UK lending points to weakening economy, say experts

Gardner believed the market had undoubtedly been impacted by the turmoil following the mini budget.

“Higher borrowing costs have added to stretched housing affordability at a time when household finances are already under pressure from high inflation,” he said, adding that the increase in mortgage rates meant that a prospective first-time buyer (FTB) earning an average wage and looking to buy a typical FTB home with a 20% deposit would see their monthly mortgage payment rise from roughly 34% of take-home pay to about 45%, based on an average mortgage rate of 5.5%.

Those pressures on households were likely to intensify. With inflation at a 40-year high of 10.1.%, it was widely expected that the Bank of England’s Monetary Policy Committee would this week raise rates by 0.75 percentage points to 3%.  

In that event, it would primarily affect mortgage holders on variable rate deals, as they would end up paying hundreds of pounds more a year in repayments.

In addition, Gardner pointed out that even with the government’s Energy Price Guarantee, that would help shield households from the soaring energy cost on wholesale markets, these costs would still be around 80% higher than a year ago.

Read more: Help to Buy scheme ending - What happens next?

Asked if he expected house prices to fall by as much as 15% over the course of 2023 - as some experts were predicting - he said: “It is very difficult to say because the housing market is very dependent on the broader economy, and that itself is very uncertain at this point, including the path for interest rates.”

He added that a relatively “soft landing” was still possible, thanks to the (still) low unemployment rate of 3.5% and household balance sheets “which are in really good shape”.

“Interest rates are increasing, but most households are protected in the short term from those increases as over 85% of mortgage balances are on fixed interest rates,” he added. “That's not to say that the situation head isn't going to be challenging for households - it clearly is - but there's going to be some important shock absorbers that should help to provide support through this period, especially if interest rates continue to edge back down with longer term interest rate settlers, as is happening at the moment.”

Reviewing house price growth over the course of the year, he said the market’s resilience had nonetheless been “surprising”, given the drop in people’s earnings and the pressure household budgets have been under.

“Even if you look at mortgage approvals in September, yes, they were down on the month, but they were still running at a pace that was above the level prevailing in 2019. So, demand had been holding up remarkably well despite those pressures on households. And the other thing which has been supporting house price growth is the supply side where clearly the number of properties on the market has remained fairly low,” he concluded.