Market steadying or calm before the storm?

Latest indicators suggest that the doomsayers have got it wrong - the market will not go into a tailspin. However, there is a small dark cloud on the horizon - complete with silver lining.

Nationwide informed us that house prices fell for the sixth month in a row in February, only to be contradicted just days later by rivals Halifax who stated that they actually rose. They did agree that modest falls were likely over the coming months before settling into a 'normal' market.

The calm

Over recent years housing has seen a series of events which have had a distorting effect on the market. A decade of ultra-low interest rates fueled demand and supported rising property prices. From 2020 to 2022, the pandemic created a huge increase in demand without a corresponding increase in supply, resulting in a 20% rise in house prices. As inflationary pressures rose, the central bank raised interest rates, a process accelerated by the now infamous mini-budget of September 2022, halting demand in its tracks.

The start of 2023 sees a number of indications that we may be moving into a more settled market -

The number of mortgages approved in the first two months was low, but this was expected as they reflect buying decisions made just after the September spike in interest rates.

In a slower market lenders are forced to compete for market share, driving rates down.

Prices appear to be stabilising, with the average annual rate of house price growth steady at around 2% over the last three months.

The Royal Institute of Chartered Surveyors monthly report shows that the number of new enquiries is now 10% above the five year average.

In his budget speech the chancellor stated that recession would be avoided in 2023 and that inflation would fall to less than 3% by year end.

No-one is expecting a really strong spring market, but it won't nosedive either.

The storm

There is a cloud on the horizon - just a small one and it has a name. Silicon Valley Bank.

As a medium size bank, its collapse will not cause a systemic risk to the financial system, but its failure has highlighted the risk inherent in holding substantial assets in government bonds.

The risk the Federal Reserve is hoping to contain is contagion, where depositors move their deposits to institutions considered too big to fail, causing a liquidity crisis for smaller banks.

That contagion could conceivably spread to this side of the Atlantic. If the UK banks become nervous about their own bond positions, it is in their DNA to conserve cash rather than to lend, with an inevitable effect on the mortgage market and the wider economy.

As with every storm, however, there is a silver lining. Money markets believe that the Bank of England may be hesitant to erode banks' balance sheets further through more interest rate rises and have now priced in lower future rates than they previously anticipated. A temporary dip, perhaps, but if sustained this would lead to lower mortgage rates.