House prices will not fall as much as feared, analysts say

House prices will not fall as much as feared despite rising mortgage rates, thanks to rising wages and a housing shortage, analysts predict.

Debate over the near-term direction of house prices remains fierce, with some predicting rapid declines with drops of as much as 35 percent.

But Peel Hunt now predicts that prices will instead “move down gently,” capping at 15 percent.

According to Peel Hunt, continued strong demand for owner-occupied homes, supported by first-time buyers hoping to escape rapidly rising rents, should support house prices in the coming months.

Homeowners have seen their purchasing power decline due to rapidly rising mortgage rates and high inflation, and many fear this will continue to affect the housing market as the Bank of England is expected to raise interest rates further.

But relatively low unemployment and strong wage growth should help people absorb higher borrowing costs, analysts say.

They also argue that the impact of rising mortgage rates will not be immediate as buyers increasingly opt for fixed rate deals in hopes of avoiding further increases in borrowing costs.

Currently, 87 percent of UK mortgage debt has a fixed interest rate, compared with 13 percent a variable interest rate.

“The changing nature of the UK mortgage market, with higher penetration of fixed rate mortgages, is dampening and delaying the impact of higher mortgage rates,” said Peel Hunt.

‘Due to the imbalance between the supply of housing and the demand for rental housing, rents have risen rapidly in recent years, which supports the demand for owner-occupied housing.

Finally, not only does the strength of the economy increase mortgage capacity as wages rise, but sustained falls in house prices tend to occur only in a period of high unemployment and a significant recession, which is inconsistent with current economic forecasts. ‘

Rapid growth of fixed-rate mortgage products after the financial crisis dampens the impact of rate hikes, says Peel Hunt

Analysts from Peel Hunt forecast that house prices will continue to “weaken moderately” over the next six to nine months.

But they will avoid a “rapid decline” like during the financial crisis in 2008 and the real estate crash of the early 1990s, when house prices fell by 20 percent.

“After that, the rate at which they rise again will likely be determined by the strength of the underlying economy (wages) and mortgage rates,” Peel Hunt added.

Mortgage rates have fallen slightly, but the average two-year fixed-rate deal remains higher than at the beginning of the month, at 6.83 percent, according to market monitor Moneyfactscompare.

They could rise further as the Bank of England is widely expected to raise key rates on Thursday.

Forecasters are divided on whether the bank opts for a 25 basis point increase to 5.25 percent or a 50 basis point jump to 5.5 percent.

House prices fell 2.6 per cent this month, the fastest pace in 12 years, according to Halifax – although Britain’s largest mortgage lender said this largely reflected the impact of historically high house prices last summer.

It also said the numbers “suggest some stability in the face of economic uncertainty, and mortgage applications held up well in June, especially from first-time buyers.”

Continued strong demand for owner-occupied homes, supported by people hoping to become homeowners to escape rapidly rising rents (see chart), should support house prices

But developers have warned of a slowdown, with the UK’s largest homebuilder Barratt revealing it could build 20 per cent fewer homes this year amid a downturn in property markets.

This has consequences for companies that supply to home builders, who receive fewer orders.

Today, landscape specialist Marshalls warned that “continued weakness” in new home construction and homeowners cutting back on real estate improvements would hit commerce in the coming months.

“Continued high inflation, rising interest rates and weak consumer confidence mean that the board expects the group’s performance in the second half to be below previous expectations,” it told shareholders today.

Given the “challenging trading conditions,” Marshalls said it would cut an additional 250 jobs as it closes its Carluke plant, cuts shifts in other facilities and restructures the group’s commercial team.

The job cuts, which should save around £9 million, come on top of the 150 jobs already cut in the second half of last year.

Marshall’s stock dropped 5 percent Monday afternoon to 262p.

But Britain’s biggest homebuilders, including Persimmon, Vistry, Bellway, Barratt and Redrow, seemed little affected by the warning, with shares falling no more than 0.3 per cent.

“With a rapid decline in house prices unlikely, we view the risk of significant asset write-downs as low,” Peel Hunt analysts said.

“With that in mind, we continue to see good value in those builders trading at substantial discounts with TNAV, such as Redrow and Bellway, or those with differentiated product offerings, such as Gleeson or Vistry Group.”