UK House Prices Experience Biggest Annual Fall in Over 10 Years Due to Higher Mortgage Rates

House prices fell by 1.1% in the year to February, marking the first annual decline in property values since November 2012.

According to recent data from Nationwide, this was due to a combination of higher mortgage rates and living costs making homes less affordable. In addition to this, prices fell by 0.5% from January, further compounding the issue.

The chief economist at Nationwide, Robert Gardner, stated that it would be "hard for the market to regain much momentum in the near term" due to the ongoing economic headwinds. Gardner highlighted that the labour market is widely expected to weaken as the economy shrinks in the quarters ahead, making it more difficult for people to afford to buy homes. He also noted that mortgage rates remain "well above" the lows seen in 2021, which adds to the affordability problem.

The average property price in the UK is now £257,406, down from £258,297 in January, and 3.7% lower than its peak in August 2022. According to Nationwide, house prices have fallen on a monthly basis for six months in a row, as higher borrowing costs have squeezed buyers. This is partly due to the Bank of England raising interest rates to tackle the soaring cost of living.

Mortgage rates were already rising last year, but they increased further after Liz Truss's mini-Budget in September, which threw financial markets into turmoil. Although they have fallen back since then, they remain far above the levels seen in late 2021, when rates were closer to 1%.

The Bank of England published figures on Wednesday showing that UK banks approved the lowest number of mortgages in January since 2009, excluding a slump at the start of the pandemic. A total of 39,637 mortgages for house purchase were approved during the month, down from 40,540 in December. This reflects the fact that people are holding off buying new homes because they expect house prices to drop further.

Looking to the future, Mr Gardner predicted that property prices would fall by 5-6% from their peak in August 2022 to the trough. However, he added that this forecast was dependent on the labour market not weakening more than people expect. Pantheon Macroeconomics believes that house prices will fall over the coming months to about 8% below their peak, as households' real disposable incomes will be squeezed again in April by the withdrawal of energy bill subsidies by the government.

The forecaster has tentatively pencilled in a 5% rise in house prices for 2024, as it believes the Bank of England will start to reduce interest rates next year. However, Capital Economics warned that the further fall in house prices in February would "keep optimism based on reports that demand has recovered in check". Even if buyer volumes have recovered, the amount they can spend on a new home has been reduced by higher mortgage rates.

The UK housing market is currently facing significant challenges due to a combination of higher borrowing costs, rising living costs, and a weakening labour market. This has resulted in falling house prices and a decrease in the number of approved mortgages. Although there are some tentative predictions of a rise in house prices in the future, this is dependent on factors such as the labour market not weakening further and the Bank of England reducing interest rates. However, for now, it appears that the UK housing market will continue to face difficulties in the near future.