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UK house prices expected to fall as mortgage rates soar

<span>Photograph: Adam Vaughan/EPA</span>
Photograph: Adam Vaughan/EPA

Rising mortgage costs and the broader cost of living crisis will push UK house prices down more sharply in the coming months, according to Halifax, after prices dipped 0.1% in September.

Halifax said the market had been almost flat since June but was now heading into a more significant slowdown as rapidly rising borrowing costs made buying a property unaffordable for more people.

Related: Kwarteng considers extending mortgage guarantee scheme

“The housing market may have already entered a more sustained period of slower growth,” said Kim Kinnaird, the director at Halifax Mortgages. “The prospect of interest rates continuing to rise sharply amid the cost of living squeeze, plus the impact in recent weeks of higher mortgage borrowing costs on affordability, are likely to exert more significant downward pressure on house prices in the months ahead.”

Earlier this week, the average five-year fixed-rate mortgage breached 6% for the first time in 12 years, while the average two-year fixed rate has passed the mark for the first time since 2008. Property experts have predicted that average house prices in the UK could fall by at least 10% next year.

About 1,000 deals have been pulled from the market in recent weeks after Kwasi Kwarteng’s mini-budget triggered a sell-off in financial markets and raised expectations for even higher interest rates.

The average new two-year fixed rate – which was 4.74% on the day of the mini-budget – had climbed to 6.16% on Friday, according to the data firm Moneyfacts. It was a similar story with five-year fixes, with the average rate on Friday standing at 6.07%.

Halifax said a typical UK property now costs £293,835 as the pace of annual growth slowed for the third month in row, from 11.4% in August to 9.9% in September, the first time it has dropped into single digits since January.

“It’s a fairly safe bet that UK house prices have now peaked,” said Tom Bill, the head of UK residential research at Knight Frank. “The impact of rising mortgage rates will begin to hit demand and spending power in coming months, which we believe will lead to a fall of 10% over the next two years for UK prices.”

Tomer Aboody, a director of the property lender MT Finance, said people would be forced to sell their homes because of higher borrowing costs. “There are hard times ahead and many people may have to downsize because they can’t afford the home they bought when interest rates were at rock-bottom,” he said.

Halifax said Wales remained the strongest performing region of the UK in terms of growth, with the average house price up 14.8% to £224,490 compared with a year ago. However, the rate has slowed from 15.8% in August.

London remained the weakest performing region, with annual growth of 8.1%. However, the average house price of £553,849 is almost twice the national average of £293,835.

“The events of the last few weeks have led to greater economic uncertainty; however, in reality house prices have been largely flat since June,” Kinnaird said. “Predicting what happens next means making sense of the many variables now at play, and the housing market has consistently defied expectations in recent times.”