The slump in the UK housing market is expected to result in a lower peak of interest rates according to Berenberg economist Kallum Pickering.
“As consumer demand (around two-thirds of GDP) is highly sensitive to house price fluctuations via net-wealth effects, the quicker-than-expected housing market correction strengthens our calls that: a) the UK is suffering a disinflationary recession; and b) the BoE does not need to do much more tightening in order to bring underlying inflationary pressures under control” Pickering wrote.
He forecast a rise in the bank rate of 50bp in December to a peak of 3.5% and thereafter expects the Bank of England (BoE) to hold rates through the first half of 2023 before cutting modestly (by around 50bp) in the second half of the year.
Pickering said while a housing market correction is "baked in the cake" by now, mortgage rates probably peaked in early September. He forecast a range of 3.5% to 4.5% over the coming months.
“If the BoE stops hiking soon, further falls in mortgage rates should contain the risk of a massive collapse in house prices of 15% or more” he added.
Pickering was commenting after the closely watched RICS survey showed a sharp fall in October with the headline figure, which measures the change in prices during the past three months, declining from 30.5% in September to -1.9% in October.
The drop was the largest in the survey’s history, which goes back to 1978.
Pickering said “although a house price correction is widely expected as part of the ongoing recession, it appears to be unfolding faster than anticipated.”
He expected demand to moderate further into winter and looks for prices to decline by around 10% by the second quarter of 2023.
But Pickering does not envisage a collapse in the housing market.
“Although falling house prices add to consumer pain and rising interest rates crimp demand, we see limited risk that the unfolding housing market correction will morph into another financial crisis.”