UK House Prices to Keep Falling, What's At Stake?

The UK housing market is expected to remain subdued as higher prices and wages find a new equilibrium - and might contribute to the BOE staying out of the tightening business.

Potential Recession Looms as UK Housing Sector Struggles

Nationwide reported earlier in the week that UK house prices fell at the fastest rate since 2009, with Halifax expected to report a similar drop in its price index later this week. The 5.3% drop in September reported by Nationwide came on the heels of the 4.2% drop already in August, continuing the trend of slowing activity in the home space as higher living costs and mortgage rates pinch potential buyers. This is the second consecutive month the price drop was a new post-2009 record.

The falling activity in the housing sector contributes to fears that the UK could fall into the recession it managed to avoid earlier in the year. Activity in the sector is around 30% below what it was in the pre-pandemic era. UK developers have naturally felt the pinch, with shares of major builders in the UK has taken a beating through most of the year. In its most recent trading update, for example, the UK's largest homebuilder, Barratt Developments, warned that it would take up to two years for the market to recover. The property development sector has been one of the larger weights on the FTSE 100 this year.

Some Relief for Homebuilders as BOE Holds Steady

House prices in the UK are projected to fall even faster through the rest of the year, even as the BOE is expected to hold steady. The fact that the BOE declined to go even higher with rates at the last meeting is seen as a muted relief for the homebuilder sector. But for the FTSE 100, the BOE's shift towards keeping rates high instead of constantly raising them will likely have a more minimal impact.

The UK's real estate market weighs just over 1% on the FTSE 100. Financials are the second largest component at 17.8%. Still, the immense impact of foreign-sourced banking, such as HSBC's exposure to China and Santander's presence in Spain, means that the developments in the UK mortgage market are likely to have a minor impact on the benchmark index. The interest rate squeeze is expected to continue to pressure the housing market, but the prospect that rates might finally be peaking could put a bottom in for the sector. With wages growing above the inflation rate, potential home buyers might finally see a way to buy a home.

Footsie Near Triangle Completion, or Further From Flag

UK's Footsie has traded somewhat rangebound for the better part of the year, with drawdowns following record-highs reached in February, currently where it started the year. Higher lows and lower highs resemble a symmetrical triangle, with chances of a flag increasing slightly under 7420 but more substantially below the low of 7200. 

If bulls instigate a premature run around the golden pocket at 7415, a truncated completion of a triangle might soar prices up to fresh record highs once 7750 and 7940 give way. Losing the Fibonacci support could weigh on prices, with an extension below 7330 opening up the door to new yearly lows.

Source: SpreadEx / UK 100

Key Takeaways

UK house prices are expected to continue falling as higher living costs and mortgage rates impact buyers. Nationwide reported a 5.3% drop in September, the largest since 2009, with Halifax expected to report a similar decline, raising concerns about a potential recession. The BOE's decision to hold provides some relief for homebuilders, but its impact on the overall FTSE 100 index is expected to be minimal. The interest rate squeeze will likely continue pressuring the housing market, but the prospect of rates peaking could signal a bottom for the sector.