House prices have fallen at the sharpest pace since the financial crisis as rising mortgage rates deter buyers, Nationwide data showed.
Prices fell by 3.4pc in the year to May, according to the building society, the biggest annual drop since 2009. In May alone, house prices slumped 0.1pc month-on-month, after rising 0.4pc in April. It has taken the average house price to £260,736, Nationwide said.
It came as mortgage approvals fell unexpectedly in April and economists warned that the number of home loans approved this year is on track to slump to the lowest level since 2008.
The current average interest rate on a two-year fixed-rate mortgage is 5.49pc, up from 3.2pc a year ago, according to Moneyfacts.
Mortgage rates had been gradually falling since spiking in the wake of Liz Truss’s disastrous mini-Budget in September. However, costs have begun to pick up again as persistent inflation data emboldens the Bank of England to raise interest rates further.
Robert Gardner, chief economist at Nationwide said: “While consumer price inflation did slow in April, it was a much smaller decline than most analysts had expected.
“As a result, investors’ expectations for the future path of the Bank of England base rate increased noticeably in late May, suggesting it could peak at around 5.5pc, well above the 4.5pc peak that was priced in around late March.”
Lucian Cook, head of residential research at Savills estate agents, warned that a second dip in house prices was on the cards.
He said: “As we look forward, the expectation that Bank base rates will have to rise further to combat inflation points to a further affordability squeeze for home buyers in the second half of the year.”
Separate data on Thursday from the Bank of England showed mortgage approvals fell sharply in April. Mortgage approvals for home purchase fell to 48,690, a 26pc drop on a year earlier and down from 51,488 in March. Meanwhile, gross mortgage lending fell to £17bn, down by 14pc since March and the lowest level since July 2021.
Analysts had expected the number of mortgage approvals to rise to 53,000 following a steady decline in mortgage rates in recent months.
Andrew Wishart, senior economist at Capital Economics, said: “Even with mortgage rates below 5pc, many would-be buyers were priced out of the market.”
Capital Economics warned that based on the current trajectory, the number of home loans agreed this year will fall to the lowest level recorded since 2008.
It forecast that mortgage approvals will fall from 752,000 in 2022 to 540,000 this year, around half the number agreed in 2021 during the peak of the pandemic property boom.
Higher than expected inflation data last week has triggered large jumps in gilt yields and markets’ expectations for future borrowing costs, which are pushing up mortgage rates.
Mr Wishart said: “Mortgage rates will rise back above 5pc imminently, and based on our forecasts will reach a peak of 5/7pc in early 2024. If so, demand will take a further leg down.”
Moody’s, the leading credit agency, said this week that high mortgage rates will tip Britain into recession this year as homeowners coming to the end of fixed rate deals are hit by soaring costs.
It warned that the UK is particularly vulnerable to a recession because so many people have short-term fixed-rate mortgages, meaning they will need to be refinanced at higher rates which will reduce household disposable income
Benjamin Trevis, of the Centre for Economics and Business Research, said: “As a result of significantly higher mortgage rates, this will likely lead to an increase in repossessions and deter some market activity.”