Yahoo Finance UK house prices fall as interest rate rises set to push mortgages higher
UK house prices recorded the biggest annual fall in nearly 14 years in May as expected increases in interest rates that will make mortgage costs surge weigh on the market.
Property values fell by 3.4% annually in May, according to lender Nationwide, marking the biggest drop seen since July 2009 when they fell by 6.2% – after the financial crisis hammered the property market.
This follows a 2.7% annual fall in April, and it comes as the Bank of England is forecast to raise interest rates to 5.5% by the end of this year, up from 4.5% today, due to the UK’s persistently high inflation.
Property prices edged down 0.1% compared with April with the average property now worth £260,736.
Aprils house price reprieve is short lived as annual house prices in May 2023 “slipped” back -3.4% & -0.1% on last month to £260,736. With further interest rate turbulence predicted in the short term expect growth to slip further before stagnating for longer @AskNationwide pic.twitter.com/YTn5r5qrWG
— Emma Fildes (@emmafildes) June 1, 2023
Mortgage rates have risen recently on expectations that the Bank of England will have to raise interest rates again. As a result, the Nationwide said "headwinds to the housing market look set to strengthen in the near term".
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Official figures last week showed the UK inflation rate – which charts rising prices – slowed in April by less than expected to 8.7%.
“Headwinds to the housing market look set to strengthen in the near term,” Nationwide’s chief economist, Robert Gardner, 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 Bank Rate increased noticeably in late May, suggesting it could peak at c5.5%, well above the c4.5% peak that was priced in around late March. Furthermore, rates are also projected to remain higher for longer,” he added.
The broader picture is that average house prices are around 4% below their peak last summer, just before the mini-budget rocked the markets and drove up mortgage rates.
Despite the concern about interest rates impacting mortgage costs, the outlook for the property market remains a fairly positive one for Nationwide.
“Nevertheless, in our view a relatively soft landing remains the most likely outcome since labour market conditions remain solid and household balance sheets appear in relatively good shape,” 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 Bank Rate peaks,” he added.
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Andrew Wishart, senior property economist at Capital Economics, warned: “We suspect that the stabilisation in prices over the last couple of months will soon give way to renewed falls.”
The cost of living squeeze is pushing down on house prices, according to Jeremy Leaf, a north London estate agent.
He said: “Continuing worries about the cost of living highlighted in the recent core inflation numbers are compromising confidence and having a knock-on effect on mortgage cost and availability, inevitably leading to a softening of property prices.”
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