UK house prices continue to display a surprising degree of resilience, says the economic forecasters at the EY ITEM Club, by only dipping 0.1% during June (although -2.6% on an annual basis)
However, they fear that this resilience will likely fade.
Martin Beck, chief economic advisor to the EY ITEM Club, warns that the rise in mortgage rates over the last month, if sustained, will increase the challenges faced by those renegotiating fixed rate mortgages.
It could, in theory, prompt a bigger fall in prices than the 10% peak-to-trough decline in values the EY ITEM Club expects.
Beck says:
The reaction of financial markets to a series of upside surprises for inflation and pay growth has caused interest rate expectations to increase and this is feeding into higher mortgage interest rates.
“The rise in swap rates reflects markets’ view that the Bank of England will continue to raise rates significantly, with Bank Rate now widely expected to peak at 6.5% early next year. But the EY ITEM Club thinks an improving inflation outlook means the market view is too downbeat and that rates will stabilise after two further rises by the Bank of England. If that prediction is correct, mortgage rates should fall back during the second half of this year, albeit to levels still high by the standards of the last decade or so.
“And there are other reasons to think that, while house prices are likely to drift down, a serious correction should be avoided.”
