Over the past year, U.K. homeowners and prospective buyers have faced increasing borrowing costs as the Bank of England attempts to control persistently high inflation.
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In June, U.K. house prices experienced their fastest annual decline in 12 years, as rising mortgage costs added more pressure to the property market.
According to the latest price index from mortgage lender Halifax, property prices dropped by 2.6% in the year leading up to June. This decline is the largest since June 2011 and a significant increase from the 1.1% drop recorded in May.
This marks the third consecutive month of price drops, with a 0.1% decrease since May. The average cost of a U.K. property is now £285,932 (£364,490), down from its peak of £293,992 in August 2022.
While the annual decline may suggest a downward trend, Kim Kinnaird, director at Halifax Mortgages, highlights that there has actually been a slight recovery in prices this year following the U.K.’s “mini budget” in October. She notes that average house prices have increased by +1.5% (£4,000) so far in 2023, with most of the growth occurring in the first quarter after a sharp fall in prices at the end of last year. However, Kinnaird points out that the housing market remains sensitive to volatility in borrowing costs.
House prices have ‘further to fall’
Borrowers in the U.K. have faced rising borrowing costs over the past year as the Bank of England has been combatting persistently high inflation.
In June, the Bank of England surprised the market by raising interest rates for the 13th consecutive time, hiking by 50 basis points and bringing the base rate to 5%. This decision came as U.K. core inflation rose month-on-month in May.
The increase in inflation and benchmark bank rates has led to higher U.K. sovereign gilt yields, which are used to price mortgages. Consequently, some lenders have raised rates or discontinued certain mortgage products.
“The summer is likely to see price cuts become even more widespread, and we may well see house prices fall more significantly.”
– Sarah Coles
Head of Personal Finance at Hargreaves Lansdowne
Sarah Coles, Head of Personal Finance at Hargreaves Lansdowne, suggests that the latest rate hike has not yet been fully reflected in the housing data, indicating further challenges for borrowers in the future.
Higher mortgage rates are expected to add further downward pressure to the housing market, with prices likely to continue falling throughout the summer. Coles highlights that sellers have already started reducing prices to attract buyers, and this trend is expected to become more widespread. Liam Bailey, Head of Global Research at Knight Frank, agrees and believes that the U.K. housing market still has room for price declines.
Although lower prices may benefit first-time buyers, Bailey points out that higher rates will still make affordability a challenge for most new market entrants.
Mortgage rates continue to rise
The Bank of England is expected to continue its efforts to control inflation with further rate hikes throughout the rest of the year.
Market analysts anticipate rates to reach a peak of 5.75% to 6% in November, and there are even scenarios in which they could reach 7%, according to JPMorgan. These expectations have led to an increase in bets favoring higher Bank of England interest rates.
Mortgage rates are set to rise further before eventually decreasing, adding to the financial burden for homeowners and worsening the rental crisis in the U.K. as buy-to-let landlords pass on higher mortgage repayments to tenants or exit the market entirely.
Halifax’s Kinnaird predicts that mortgage rates will remain higher for a longer period, resulting in continued downward pressure on house prices in the coming year.
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