Recession fears as house prices slump and manufacturers suffer worst month since lockdown

Price of a typical home is now 4.5 per cent below the August 2022 peak

A slump in house prices and a sharp slowdown in the manufacturing sector today raised fears that the UK is heading for a recession.

UK house prices fell at the fastest annual rate in 14 years in July as spiralling mortgage rates and the rising cost of living began to bite.

Bosses in the manufacturing sector also reported their gloomiest outlook since the height of the first Covid lockdown ahead of the Bank of England’s latest expected interest rate hike on Thursday.

Property values fell by 3.8 per cent last month compared with a year earlier, the biggest drop since July 2009, Nationwide Building Society said.

Experts warned the increase in mortgage rates because of the Bank’s rate hikes, as well as the income squeeze facing consumers, has left buyers less able to afford homes.

Residential research director at property consultancy JLL, Marcus Dixon, told The Independent the impact of higher mortgage rates “seems to be coming through now”.

And Jonathan Rolande, founder of the National Association of Property Buyers, also blamed challenges with affordability.

“If you could afford to borrow £100,000 a year ago, you might only be able to afford to borrow £80,000 now because of the increase in rates,” he said.

He added: “The post-Covid boom has calmed down, people can’t afford that much now, and those who can are wary.”

The Bank of England has raised interest rates 13 times since December 2021, from 0.25 per cent to 5 per cent, in a bid to tackle spiralling inflation, pushing up mortgage rates in turn.

It is expected to hike rates by a further 0.25 percentage points to 5.25 per cent when it meets on Thursday, with the rate of price rises standing at 7.9 per cent.

The Bank hopes raising interest rates will stop people spending as much, helping return inflation to its target rate of 2 per cent. Economists believe the aggressive interest rate increases could lead to a recession.

The drop in house prices came as the closely watched purchasing managers’ index (PMI) dropped at the steepest pace so far this year, from 46.3 to 45.3.

Any PMI below 50 indicates business activity is falling, with bosses in the manufacturing sector laying off staff and cutting investment.

As fears mount about the ongoing cost of living crisis and the impact of further interest rate hikes, industry chiefs are scaling back the amount they make in anticipation of a drop-off in demand down the line.

“Today’s results show the economy is on the glide path to anaemic growth with industry now at risk of facing a recession,” said Make UK senior economist Fhaheen Khan.

Meanwhile a former Bank of England chief said Britain “needs” a recession to bring inflation under control.

Alex Brazier, the Bank’s former financial stability director, said it has already hit the brakes on the economy “pretty hard” with a series of interest rate hikes.

But he told BBC Radio 4’s Today programme: “Inflation has now become entrenched and so, to be honest, getting inflation to 2 per cent – the Bank’s target – probably does entail a further growth slowdown or recession and higher unemployment.”

Thomas Pugh, economist at RSM UK, said: “The fall in the manufacturing PMI suggests that momentum and resilience in the private sector are starting to falter and it is not difficult to see the economy slipping into recession in early 2024.”

But Professor Abhinay Muthoo, an economist and fellow at the National Institute for Economic and Social Research, said the figures were “nothing substantive to worry about”.

“Given the overall context of where we are, it could have been worse,” he said.

“We might see a recession, probably not, but if we do technically enter into one it will be mild – miles away from 2007-08,” he added.

House prices dropped by 0.2 per cent month-on-month in July, to reach £260,828 on average.

The price of a typical home is now 4.5 per cent below the August 2022 peak, Nationwide said.

Mr Dixon said given the rise in interest rates the drop in house prices was “not unexpected, but not as bad as expected”.

He told The Independent: “The impact of relatively rapidly increasing mortgage rates hadn't necessarily completely been felt in the market.

“And that does seem to be coming through now.”

Mr Rolande said how bad things get depend on “where the bounce back is”.

He told The Independent: “If we start to bounce back in three to six months, this would have been a little bit of a correction and most people will have been able to muddle through.

“If this just goes on and on, eventually we will start to see people struggling with mortgages and landlords struggling to retain buy-to-let properties.”

Nationwide chief economist Robert Gardner said: “While activity is likely to remain subdued in the near term, healthy rates of nominal income growth, together with modestly lower house prices, should help to improve housing affordability over time, especially if mortgage rates moderate once [the Bank of England base rate] peaks.”