House prices drop: hope for gradual deflation, fears of the bubble bursting

Sarah Coles, head of personal finance at Hargreaves Lansdown, comments on the publication of the Nationwide House Price Index for February 2023, which shows house prices drop with hope of a gradual deflation, along with fears of the bubble bursting.

Key points from publication:

• • Annual house price growth has finally turned negative – prices are down 1.1% in a year.
  • They fell 0.5% in a  month – making February the weakest month since November 2012, and the sixth consecutive month of falls.
  • The average house price is £257,406. This is down from £258,297 in January and 3.7% below August’s peak (£273,751).

Sarah Coles says:

“We’ve had the first annual house price fall since the start of the pandemic boom. The question is whether this is the beginning of a gradual and modest deflation, or a bubble that’s set to burst.

“There’s no doubt we’ll see more falls in the coming months, but overall predictions of drops come in anywhere between 5% and 12%. Unfortunately, it’s getting increasingly difficult to remain optimistic.

“Runaway mortgage rises at the end of last year proved the turning point for the market. After withstanding months of increasingly painful inflation, buyers were at full stretch – and the mortgage market mayhem in the aftermath of the mini-budget was the final straw.

“We knew from that point that a house price correction of some kind was likely to be on the cards.

“Since the start of 2023. there has been some hope within the market that falling mortgage rates would bring more buyers back, so falls would remain in single digits, and we’d soon be back on track. This remains a real possibility.

“However, there are a number of factors that could derail this view.

“While mortgage rates are still expected to fall this year, it’s not going to be a straight line. Recent spending and wage figures are raising the spectre of higher inflation lasting longer than had been expected.

“This would mean the Bank of England pushes rates up further – making mortgages more expensive. The market was pricing in a 0.25 percentage point rise later this month, but now it has started pricing in a 0.5 point rise, so some of the most competitive fixed rate mortgages have been pulled, and some lenders are repricing higher.

“This doesn’t mean the mortgage market has changed direction completely, but even a small blip is likely to take a toll on the fragile confidence of buyers.

“This is combined with the depressing effect of a stagnating economy and the threat of recession.

“Buyers who are worried about rising prices and the risk of losing their jobs may well decide that this is the wrong time to take on a huge mortgage and make themselves a hostage to rising rates.”

Kindly shared by Hargreaves Lansdown

Main article photo courtesy of Pixabay