(Bloomberg) -- The UK housing market is sputtering again, with economists predicting that the downturn has further to run as rising interest rates bite into the budgets of consumers.
Data Thursday showing that house prices had resumed their decline last month and mortgage approvals unexpectedly fell in April came as former US Treasury Secretary Larry Summers and Moody’s both warned the UK is facing a recession.
“Britain’s housing market is undergoing a correction,” said Niraj Shah, an economist at Bloomberg Economics. “House prices are likely to fall by more and for longer in real terms given inflation is proving sticky.”
Home values have fallen more than 10% from their nominal peak in August when inflation is taken into account, according to an analysis by Bloomberg Economics. They’re down almost 13% since the peak in real terms in March of 2022.
Housing and economic data indicate more pain ahead for Britain, which is suffering economic stagnation and the worst cost of living increases among Group of Seven nations. Trouble in the housing market could also cost Prime Minister Rishi Sunak’s ruling Conservative Party, which is trailing the Labour opposition in polls ahead of an election expected next year.
Read more: Housing Market Calm Hides Brewing Correction Storm
Following are the key charts showing the outlook for UK house prices:
The Bank of England has raised interest rates from 0.1% to 4.5% since late 2021 in an effort to tackle stubbornly high inflation. Yet households have yet to feel the full impact.
About 1.3 million households will do so this year when they are forced to refinance cheap fixed-rate deals at substantially higher rates. That could add around £200 ($250) a month to the interest payments of the average mortgagor, according to the BOE.
Those rates could be even higher than thought just a few weeks ago, after a shock inflation reading last month dashed hopes of a pause in the BOE’s most aggressive rate-tightening cycle in four decades.
Instead, traders are pricing in a hike to as high as 5.5% this year. In response, mortgage rates, which had eased after surging to 14-year highs in the market turmoil of last autumn, are rising again. Rates on the most popular mortgages are now above the 5% level the BOE has identified as a stress threshold for consumers.
The average two-year fixed-rate home loan surged 15 basis points on Friday, the biggest one-day increase since October, with five-year deals following suit, according to Moneyfacts Group Plc. They now stand at 5.64% and 5.32%, respectively, the highest since January.
“Headwinds to the housing market look set to strengthen in the near term,” Robert Gardner, chief economist at Nationwide Building Society, said after the lender reported a 0.1% drop in property values in May. Prices are now 4% below their peak last year.
Nationwide issued its report shortly before BOE data showed lenders authorized 48,690 home loans in April, 6% fewer than in March. Households repaid £1.4 billion of mortgage debt in April, the weakest month excluding the pandemic on record.
Meanwhile, mortgage lenders have started to pull cheap deals from the market in anticipation of higher borrowing costs, in an echo of the budget crisis that wrecked Liz Truss’s short-lived premiership.
According to data provider Moneyfacts, lenders have withdrawn close to 800 residential and buy-to-let mortgage products in a matter of days.
The prospect of rising borrowing costs has even revived talk that Britain could slip into recession, a threat to Sunak and the Conservatives.
Nor will a modest fall in house prices do much to help those unable to get onto the housing market after a decades-long housing boom. Affordability is particularly stretched in London, where prices paid by first-time buyers are around nine times their average salary.
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--With assistance from Neil Callanan and Damian Shepherd.
(Updates with average mortage rates as of Friday)
©2023 Bloomberg L.P.