UK house prices drop for fourth month running, as Halifax predicts ‘gradual decline’

Introduction: Halifax reports house prices fell again in July

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

UK house prices dropped again last month, lender Halifax reports this morning, as higher interest rates cool the market.

But Halifax says it expects a “gradual” drop in prices in the coming months, rather than a “precipitous decline”.

Its monthly house price index, just released, shows that the average house price dropped by 2.4% on an annual basis in July. That’s a pick-up compared with June, when prices fell by 2.6% – the biggest drop since 2011.

On a monthly basis, the average house price fell by -0.3% in July, the fourth consecutive monthly decline.

It means the typical UK home now costs £285,044, down from a peak of £293,992 last August, on Halifax’s gauge of the housing market.

But, Halifax also says the market is showing ‘some resilience, although Southern England and Wales are seeing the most “downward pressure on property prices”.

For the 4th consecutive month – Avg house prices are chipped. In July 23 this was by -0.3% making the avg house now worth £285,044 down -2.4% annually and £8,948 less than Aug 22 peak. The South East & London are taking the biggest annual hit falling -3.9 & -3.5 @HalifaxBank pic.twitter.com/hgurpNuTJR

— Emma Fildes (@emmafildes) August 7, 2023

Kim Kinnaird, director of Halifax Mortgages, explains today’s report:

“Average UK house prices edged down slightly in July, with the monthly fall of -0.3% equivalent to a drop of around £1,000 in cash terms. While this was the fourth consecutive monthly decrease, all have been smaller than -0.5%.

“In reality, prices are little changed over the last six months, with the typical property now costing £285,044, compared to £285,660 in February. The pace of annual decline also slowed to -2.4% in July, versus -2.6% in June.

These figures add to the sense of a housing market which continues to display a degree of resilience in the face of tough economic headwinds.

UK house prices to July 2023, from Halifax — Photograph: Halifax

This is the latest in a series of signs that higher interest rates have cooled the housing market.

Last week, rival lender Nationwide reported that house prices fell at the fastest annual rate in 14 years last month, by 3.8%.

And online portal Rightmove reported last month that the average price tag on a home coming onto the market fell by £905 or 0.2% in July.

Also coming up today

European stock markets are set to open lower, after a late drop on Wall Street on Friday night saw the Nasdaq 100 and S&P500 both post their worst weekly performances since March.

The Bank of England’s chief economist, Huw Pill, will hold a Q&A this evening about the cost of living and current economic conditions, just a few days after the BoE raised interest rates to a 15-year high.

UK companies posting earnings today – PageGroup – US companies – Monday – KKR, Tyson Foods – Economic data – Halifax House Prices, Germany Industrial Production, US Consumer Credit

— David Buik (@truemagic68) August 7, 2023

The agenda

7am BST: Halifax UK house price index for July
11am BST: Spanish consumer confidence for July
5pm BST: Virtual Q&A with Bank of England chief economist, Huw Pill

Key events

Here’s our news story on this morning’s Halifax house price report:

UK lenders have not, yet, made significant changes to mortgage rates since the Bank of England lifted base rate to 5.25% last Thursday.

Moneyfacts reports that the average 2-year fixed residential mortgage rate has fallen slightly to 6.84% this morning, down from 6.85% on Friday (and for most of last week).

The average 5-year fixed residential mortgage rate today is 6.35%, unchanged from Friday.

Former UK chancellor Kwasi Kwarteng has revealed he is among those suffering from the jump in mortgage costs since his mini-budget last autumn, as he has a tracker mortgage

In an interview with GB News last weekend, the former chancellor was asked whether he felt any sympathy for those affected by the rise in mortgage rates, before letting on that he was among them.

Kwarteng said:

“I’m probably revealing too much, but I’m on a tracker as well.

My bills have gone up considerably.”

Here’s the full story:

House buyers should approach the market ‘with caution’, following the four monthly falls in prices in a row, says Myron Jobson, senior personal finance analyst at interactive investor:

For many, the decision to buy or not to buy hinges on where mortgage interest rates land, Jobson points out:

Inflation is still key to the direction of mortgage rates. Fixed mortgage rates dipped following the lower-than-expected fall in inflation in June before creeping higher ahead of the Bank of England’s latest interest rate hike. Inflation is expected to ease significantly in the coming months, led by a fall in energy costs – which could pull down mortgage rates in the process.

Put simply, if inflation starts to move meaningfully lower, this takes the pressure off the Bank of England to continue raising interest rates, so mortgage rates could follow.

“Buyers should proceed with caution. With home prices and mortgage rates remaining elevated, buyers should be careful to avoid biting off more than they can chew.”

Britain’s chronic problem of poor housing availability may support house prices, even as it becomes more expensive to get a mortgage.

As Gareth Lewis, managing director of property lender MT Finance, points out, there aren’t enough houses for everyone who would like to buy one:

‘The continued decline in house prices is unsurprising as the market remains impacted by rate uncertainty and affordability issues. Buyers are continuing to either play the waiting game or become more aggressive when offering on properties.

But there are positive signs – there is still the desire to buy, but with a realignment with what is realistic or achievable in value.

‘The housing market is resilient, there are still not enough houses to go around so we will likely continue to see strong values, even with so much uncertainty.’

Back to the UK housing market, mortgage brokers and estate agents are backing Halifax’s forecast of a gradual decline in house prices.

Stephen Perkins, managing director at Norwich-based brokerage Yellow Brick Mortgages, says there was “certainly” a slowdown in sales in July.

High mortgage rates and talk of falling house prices to come are resulting in many buyers waiting for better conditions.

As more would-be sellers languish on the market with no interest from potential buyers, they will have to reduce their asking prices to attract offers. So house prices will drop over the coming months. However, it will be a more gradual correction of 5%-10% rather than the more extreme crashes that have been suggested by some. This appears to be the view of the Halifax, too, based on this latest house price report.”

Tom Bill, head of UK residential research at Knight Frank, predicts a 5% fall during 2023.

“The journey back to long-term rate normality has been fraught and put downwards pressure on house prices and sales volumes over the last year.

The previous government went too far, too fast for financial markets and the Bank of England has been accused of doing too little too late. However, some lenders are cutting mortgage costs as the bank rate nears its peak, which means that while sentiment will remain subdued, it should improve in the second half of this year.

While we expect UK prices to fall by 5% in 2023, demand should prove more resilient than expected given the shock-absorber effect of strong wage growth, lockdown savings, the availability of longer mortgage terms, forbearance from lenders and the popularity of fixed-rate deals in recent years.”

Saudi Aramco posts $30bn profits in Q2

Elsewhere, Saudi Arabia’s oil giant has reported profits of around £26.3bn for the last quarter, despite the drop in energy prices.

Saudi Aramco has posted net income of 112.8bn riyal for April-June, or around $30bn.

That’s a 38% drop, year-on-year, reflecting the drop in crude oil and gas prices in 2023 compared to the surge after the Ukraine war.

Aramco President & CEO Amin H. Nasser, says the results are “strong”, and shareholders will benefit through new “performance-linked dividends” over the next six quarters:

We continue to demonstrate our long-standing ability to meet the needs of customers around the world with high levels of reliability. For our shareholders, we intend to start distributing our first performance-linked dividend in the third quarter.

Aramco intents to keep investing in raising its oil and gas production, despite warnings from environmental campaigners that fossil fuels must be kept in the ground to achieve net zero.

Nasser says:

“At Aramco, our mid to long-term view remains unchanged. With a recovery anticipated in the broader global economy, along with increased activity in the aviation sector, ongoing investments in energy projects will be necessary to safeguard energy security.

“We are maintaining the largest capital spending program in our history, with the aim of increasing our oil and gas production capacity and expanding our Downstream business — with petrochemicals projects, such as our $11.0 billion expansion of the SATORP refinery with TotalEnergies, essential to meet future demand.

Regional house prices: South East England sees largest falls

Average house prices fell on an annual basis in almost all parts of the UK in July, Halifax reports this morning.

House prices are facing the most downward pressure in the South East – prices have dropped by 3.9% over the last year, meaning the average price has dropped by just over £15,500 in the last year (down to £382,489).

In Greater London, average property prices are down by -3.5% annually, meaning the average price in the capital is now £531,141.

But, the West Midlands bucked the trend – with prices flat year-on-year at £250,285.

Elsewhere, the rapid boom in prices during the pandemic in Wales has ended. Price in Wales are down by 3.3% on an annual basis (lowering the average house price to £214,495).

In Scotland, prices were down by 0.7% year-on-year, while in Northern Ireland they were down by just -0.3% annually.

The buy-to-let sector appears to be “under some pressure”, Halifax’s Kinnaird adds, although:

…elevated interest rates are just one factor impacting landlords’ business models, together with considerations of future rental market reforms.

It remains to be seen how many may choose to exit and what that could mean for the supply of properties available to buy.

First-time buyers eye smaller homes due to rising mortgage costs

The jump in mortgage costs in recent weeks is forcing first-time buyers to look at smaller properties than they would have otherwise aimed for, Halifax says.

Kim Kinnaird, director at Halifax Mortgages, explains:

“In particular, we’re seeing activity amongst first-time buyers hold up relatively well, with indications some are now searching for smaller homes, to offset higher borrowing costs.

Halifax: House price falls likely to be gradual, rather than precipitous

Looking ahead, Halifax warns that borrowing costs are likely to remain much higher than over the last decade, following the recent jump in mortgage costs.

Kim Kinnaird, director at Halifax Mortgages, points out that the rise in mortgage rates appears to have stabilised in recent days, so falls are likely to be ‘gradual’:

Expectations of further Base Rate increases from the Bank of England were tempered by a better-than-expected inflation report for June.

However, while there have been recent signs of borrowing costs stabilising or even falling, they will likely remain much higher than homeowners have become used to over the last decade.

“The continued affordability squeeze will mean constrained market activity persists, and we expect house prices to continue to fall into next year. Based on our current economic assumptions, we anticipate that being a gradual rather than a precipitous decline.

And one that is unlikely to fully reverse the house price growth recorded over recent years, with average property prices still some £45,000 (+19%) above pre-Covid levels.”