Fastest rate of decline in UK house prices since 2009
The world's largest building society Nationwide has reported a more significant than anticipated decline in house prices, with a 5.3% drop in the year leading up to August. This translates to an average property value of £259,153, marking a £14,600 decrease from the previous year. The Bank of England's interest rate hikes have driven mortgage payments higher, contributing to the price dip.
While the housing market's activity is well below pre-pandemic levels, with mortgage approvals 20% lower than the 2019 average, Nationwide's chief economist, Robert Gardner, remains optimistic. He believes a "relatively soft landing" is still attainable. Factors such as low unemployment and the prevalence of fixed-rate mortgages should help borrowers manage higher borrowing costs.
Though housing activity may stay subdued for now, Gardner suggests that a combination of income growth and lower house prices could enhance affordability if mortgage rates stabilise. Richard Donnell, executive director at Zoopla shares the same view and said: “House price growth has slowed rapidly over the last year as demand weakens in the face of higher mortgage rates,” while indicating mortgage rates need to fall below 5% to improve affordability.
Economists predict lower house prices to help first-time buyers; higher mortgage rates might offset the benefits.
And while activity may remain subdued in the near term, on a positive note, Mr Gardner believes a mix of income growth and lower house prices could improve affordability if mortgage rates cool. Additionally, there has been a shift in property preferences, with a reduced demand for detached houses as buyers seek smaller, more affordable options. However, increasing housing costs are adding pressure to families during a time when inflation is easing, albeit following a period of high energy costs.
The evolving cost of living crisis has affected affordability and demand in the housing market, leading the Bank to hope for a broader economic slowdown to curb price increases. Data shows a nearly 10% drop in mortgage approvals last month, and the UK is on track for approximately one million house and flat sales by year-end, the lowest since 2012.
Average rates for two and five-year fixed residential mortgages remain above 6%, driven by higher funding costs for lenders as the Bank of England continues its battle against inflation. Financial markets expect the Bank's rate to peak just below 6% early next year, up from its current 5.25%.
Nationwide and other mortgage lenders are reducing some fixed and tracker products by up to 0.15 percentage points due to the changing rate environment.
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