UK house prices extend falls as mortgage repayments soar

UK house prices have fallen further as rising mortgage rates deterred home buyers and prompted owners to repay property loans at a near record rate.

Figures from the Nationwide Building Society released on Thursday showed prices of the average property in May were 3.4 per cent lower than a year earlier, with the annual fall accelerating from 2.7 per cent in April.

The dip came as separate data from the Bank of England showed households reduced overall mortgage debt by £1.4bn in April, the highest net repayment since records began in 1993 apart from one month during the Covid pandemic.

The Nationwide said that prices fell 0.1 per cent in May, reversing an unexpected rise in April in its data, which was not replicated in other house price measures.

With the exception of the April blip, the Nationwide figures showed that house prices have fallen for the past nine months in response to the Bank of England’s aggressive increases in interest rates.

Robert Gardner, Nationwide’s chief economist, said the signs were not looking positive for the housing market in the months ahead, even though the level of mortgage approvals and housing transactions had recovered from a trough after Liz Truss’s “mini” Budget.

“Headwinds to the housing market look set to strengthen in the near term,” Gardner said, pointing to current financial market forecasts suggesting the BoE will feel compelled to raise interest rates from 4.5 per cent to 5.5 per cent to bring inflation back to target.

These expectations were “well above the 4.5 per cent peak that was priced in around late March”, Gardner said, with borrowing costs “also projected to remain higher for longer”.

Many lenders, including the Nationwide, have already pulled fixed-rate mortgage offers and replaced them with higher-cost loans in response to the financial market moves following disappointing inflation figures for April, which showed core inflation rising to 6.8 per cent from 6.2 per cent the previous month.

Despite the immediate difficult prospects, Gardner did not predict a deep downturn in house prices because employment levels were high and household finances were generally healthy.

“While activity is likely to remain subdued in the near term, healthy rates of nominal income growth, together with modestly lower house prices, should help to improve housing affordability over time, especially if mortgage rates moderate once [the BoE interest] rate peaks,” he said.

Responding to the figures, Chris Druce, senior research analyst at estate agent Knight Frank, said potential purchasers should expect some volatility around a reasonably stable trend in prices.

“There is still an element of price exploration playing out in the residential property market, as buyers and sellers adapt to the reduction in spending power that has occurred due to the significant increase in borrowing costs over the last 18 months,” he said.

The BoE said that households’ desire to repay mortgage debt came as new mortgage approvals dropped from 51,500 in March to 48,700 in April.

Gross mortgage lending of £17bn in April was 25 per cent lower than the average of the previous six months, highlighting the reduction in demand for loans as interest rates have risen.