Potential Turbulence Ahead for UK Property Market as Housing Prices See Sharpest Annual Decline in Nearly 14 Years

The property market could face more turbulence, with the most significant annual decrease in housing prices since July 2009, and increasing likelihood of interest rate hikes, reports Nationwide. The building society predicts a subdued near-term market, while other property analysts fear that buyers and sellers may see even more challenging times.

The housing market’s recent data shows a fall of 6.2%, the largest since 2009, and a month-on-month dip of 0.1% in May. The average UK house price now stands at £260,736. Despite these trends, Nationwide reported a glimmer of recovery in the market last month, with a 0.4% rise in monthly prices, and a year-on-year improvement from -3.1% in March to -2.7% in April.

Nationwide’s chief economist, Robert Gardner, interpreted the recent data as largely reflecting base effects, with seasonally adjusted prices remaining stable month-over-month. However, he noted that the current average house price still sits four percent below the peak of August 2022.

Although recent Bank of England data indicated some resurgence in housing market activity, the volume of approved mortgages for house purchase in March remained about 20% below pre-pandemic levels. Gardner added that further challenges are likely to intensify in the near future. Despite lower-than-expected consumer price inflation in April, he anticipates that impending interest rate rises, and the projection of prolonged high rates could once again elevate mortgage rates. Refinance is also an option for those looking for a lower mortgage interest rate.

Despite this, Gardner remains cautiously optimistic about the long-term affordability of homes, citing strong labour market conditions and robust household finances. He anticipates that substantial nominal income growth, paired with slightly reduced house prices, should enhance housing affordability over time.

However, Alice Haine, a personal finance analyst at Bestinvest, expresses more concern. She observes that the year’s promising start with rising market activity, falling mortgage rates, and a strong labour market, is now overshadowed by increasing interest rates and gilt yields. She points out that expectations of further interest rate hikes have significantly influenced bond markets, pushing up swap rates used to price home loans. Consequently, borrowers may face higher mortgage rates, on top of already high living costs and increasing taxes. Refinancing opportunities may also be affected.

This change in interest rates has led to hundreds of residential and buy-to-let mortgages being withdrawn from the market as lenders reassess their propositions.

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, suggests that Nationwide’s data indicates an ongoing struggle with affordability for buyers. Meanwhile, the Bank of England’s Money and Credit report shows a fall in net mortgage approvals for house purchases from 51,500 in March to 48,700 in April. Additionally, homeowners’ net repayment of mortgage debt reached £1.4 billion in April.

Excluding the impact of the COVID-19 pandemic, the Bank indicated that net borrowing of mortgage debt has hit a record low since the series’ initiation in April 1993.

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