Falling property prices and mortgage approvals since last autumn are the start of a sustained correction in the housing market, in our view. An average of the Nationwide and Halifax measures showed prices in January down 3.5% from last summer’s peak, the biggest drop over an equivalent period since 2009. And approvals ended last year at the lowest level since 2009, excluding the pandemic period. 

These moves are the consequence of several adverse forces. Mortgage rates have increased significantly, household real incomes are falling, affordability remains stretched, and demand is probably suffering from some potential buyers delaying purchases in expectation of further price falls.

We expect a peak-to-trough drop in prices of 10%-15%. In cash terms, this would take values only back to the level in mid-2021, but high inflation means the real-terms fall will be more substantial (Chart 1). 

Chart 1: We expect a sizeable, real terms fall in house prices, though less severe than in 2008-2009

While we don’t anticipate a crash, a downturn in the housing market is one factor behind our view that the UK economy will be in recession for part of this year. A weaker housing market will likely have a direct effect on the economy via less construction activity. Lower prices will squeeze builders’ margins, leading to some projects becoming increasingly unviable and being shelved.