Downturn moderates, but outlook remains challenging

The partial reversal of the spike in mortgage rates following the “mini” budget has helped to stem the deterioration in housing market demand. Our measure of the average quoted mortgage rate has fallen from a peak of 5.7% in October to 4.7% in February, which helped to drive a slight recovery in mortgage approvals. However, optimism based on falling mortgage rates is unlikely to last. With banking sector concerns limited in the UK but inflation surprising to the upside, interest rate expectations have stabilised at a level which makes a further fall in mortgage rates unlikely. (See Chart 1.) That, alongside our forecast that the economy will slip into recession later this year, mean we are content with our view that most of the drop in house prices is yet to come.