House Prices Fall by Largest Amount Since 2009 as Interest Rate Hikes Hit

UK property prices have experienced the biggest drop in 14 years, new data has revealed.

According to the latest Nationwide House Price Index, property prices in July fell -3.8 per cent compared to the same time last year, the weakest performance since July 2009, and even further than the -3.5 per cent year-on-year fall in June.

According to the monthly index, which is seasonally adjusted, the figure for July 2023 is 516.6, down from June’s 517.8. This translates to a monthly change of -0.2 per cent from the 0.1 per cent increase seen in June. The average house price in July, without seasonal adjustment, stood at £260,828, a slight drop from June’s £262,239. The negative growth has now placed the price of a typical home 4.5 per cent below the August 2022 peak.

Nationwide’s Chief Economist, Robert Gardner, commented on the figures in advance of the Bank of England’s most recent 0.25 per cent interest rate increase to 5.25 per cent on Thursday: “Investors’ views about the likely path of UK interest rates have been volatile in recent months, with the projected bank rate peak fluctuating between 5 per cent in mid-May and 6.5 per cent in early July. There has been a slight tempering of expectations in recent weeks but longer-term interest rates, which underpin mortgage pricing, remain elevated.”

Gardner also pointed out that housing affordability remains a significant concern, giving an example where a potential buyer with the average wage looking to buy a typical first-time buyer property with a 20 per cent deposit would see monthly mortgage payments account for 43 per cent of their take-home pay, assuming a 6 per cent mortgage rate. This percentage is up from 32 per cent a year ago and significantly above the long-term average of 29 per cent. Deposit requirements also continue to be a barrier, with a 10 per cent deposit equivalent to 55 per cent of gross annual average income.

This affordability challenge is likely a key factor in the subdued housing market activity in recent months. In June, there were 86,000 completed housing transactions, 15 per cent lower than the same time last year and around 10 per cent below pre-pandemic levels. Recent mortgage approval data did show a slight increase in activity for June, but overall activity remains approximately 20 per cent below 2019 levels.

Despite the gloomy figures, Gardner expressed optimism that a relatively soft landing is achievable, provided broader economic conditions remain stable. Unemployment is expected to stay low, below 5 per cent, and the majority of existing borrowers are anticipated to handle the impact of higher borrowing costs.

While short-term activity may remain subdued, improvements in housing affordability are expected in the long term, especially if mortgage rates moderate once the bank rate peaks.

In fact, lenders’ responses to the latest interest rate rise last week have been largely factored into their gradually falling rates and property experts expect mortgages to continue their fall gradually over the next few weeks. Matt Smith, Rightmove’s mortgage expert explains: “June’s more positive inflation numbers have given the market renewed confidence that inflation will continue to fall, and the Base Rate won’t have to go as high as previously feared, meaning lenders can tentatively start to reduce rates. All eyes are now on July’s inflation figures in a couple of weeks – more positive news could accelerate rate drops, while any surprises would temper the current renewed market optimism.”