What’s the deal with the housing market?

As we’ve outlined previously, the Bank of England is likely close to the peak in their interest rate tightening cycle. But the impact of the rapid rise in borrowing costs on the housing market over the past year is becoming clearer and will weigh on economic growth over the year ahead.

Indicators of activity in the housing market show a marked weakening in activity. Transaction volumes were down 19% in March compared to 12 months before and have fallen 57% from their post-COVID peak in June 2021. Furthermore, house prices have fallen from their summer 2022 highs with forecasters expecting declines of approximately 6% in 2023 and 1% in 2024. If realised, these would mark the first annual decline in house prices since 2011.

This note will explore the ways in which an extended decline in prices could dampen economic growth beyond the property sector: notably through a drag on consumer spending, weaker construction, disruption to the financial sector and impacts on the wider economy.