UK house prices experienced a significant decline last month, marking the fastest annual rate drop in 14 years. The main factor behind this decrease is higher interest rates, which are making it challenging for individuals to secure a mortgage and purchase property. Nationwide building society reported a 3.8% year-on-year decrease in prices, the sharpest decline since the 2009 financial crisis. Comparatively, prices fell by 3.5% in June. The average price of a typical home now stands at £260,828, 4.5% lower than the peak reached in August of the previous year. In July alone, prices dropped by 0.2%.
The Bank of England has raised interest rates continuously since December 2021 to combat rising inflation. On Thursday, the Bank is expected to raise interest rates from 5% to 5.25%. These higher interest rates have resulted in a substantial increase in mortgage costs over the past few months, rendering homeownership unaffordable for many individuals. Those looking to remortgage after their fixed-rate mortgages expire are facing significant payment hikes, sometimes amounting to hundreds of pounds. Currently, the average two-year fixed deal stands at 6.81%, while the average five-year fixed deal is 6.34%.
According to Robert Gardner, the Nationwide chief economist, housing affordability remains a significant concern for potential homebuyers relying on mortgages. For instance, individuals with an average salary seeking to purchase a typical first-time buyer property with a 20% deposit would have to allocate 43% of their take-home pay towards monthly mortgage payments, assuming a 6% interest rate. This percentage represents a significant increase from 32% the previous year and is well above the long-term average of 29%. Gardner notes that this challenging affordability situation explains the recent subdued activity in the housing market. In June, there were 86,000 completed housing transactions, 15% lower than the previous year and approximately 10% below pre-pandemic levels.
While mortgage approvals have seen an uptick in June, Gardner points out that most of these applications were submitted prior to the recent rise in longer-term interest rates. Bank of England data reveals that mortgage approvals in the UK have reached their highest level since October as individuals rush to secure home loan deals before interest rates rise further. Nationwide believes that a housing crash is unlikely, as long as unemployment, currently at 4% in the UK, remains below 5%. The majority of borrowers should be able to manage higher interest rates.
Economists predict further decreases in house prices. Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, suggests that consumers’ confidence remains below average, and the belief that house prices will continue to fall is deeply ingrained. Therefore, house prices may need to drop by approximately 8% from their peak to restore demand and supply balance. Imogen Pattison, assistant economist at Capital Economics, forecasts an additional 7% decline in house prices on top of the current near-4% decrease. While mortgage rates are believed to have reached their peak, they are expected to remain at 5.5% to 6% until mid-2024, when the Bank of England may begin reducing the Bank rate.
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