House prices falling at their fastest rate in nearly 14 years as buyers reel from higher interest rates

(Yui Mok/PA) (PA Archive)
(Yui Mok/PA) (PA Archive)

House prices are falling at their fastest rate for almost 14 years as buyers reel from the impact of sharply higher interest rates, figures showed on Thursday.

The annual rate at which prices are dropping picked up pace from 2.7 per cent in April to 3.4 per cent last month, the biggest fall since the aftermath of the financial crash in July 2009, according to lender Nationwide. Commentators said that the normal “spring bounce” seen in the London market at this time of year failed to materialise with buyers spooked by the threat of yet more interest rate pain.

The building society warned that further rate hikes from the Bank of England would “strengthen the headwinds” facing the already nervous market, although a full-scale crash is seen as unlikely. The Bank has already pushed through 12 rate increases, lifting the cost of borrowing from 0.1 per cent to 4.5 per cent since December 2021, in a bid to curb galloping inflation.

However, official figures last week showing that the Retail Price Index fell far less than expected in April to 8.7 per cent panicked City markets, which now fear the Bank will have to raise rates to as high as 5.5 per cent over the coming months.

That in turn brought turmoil to the fixed-rate mortgage market, where prices have jumped and hundreds of deals have been withdrawn.

On Thursday the average rate on a two-year deal was 5.49 per cent, up from 5.45 per cent on Wednesday, according to latest data from analysts Moneyfacts. The average five-year, fixed-rate deal rose from 5.12 per cent to 5.17 per cent, the highest since January. Meanwhile, the latest figures from the Bank of England showed the number of mortgage approvals dropping from 51,500 in March to 48,700 in April in another sign of rapidly falling confidence in the market.

Nationwide’s chief economist, Robert Gardner, said: “While consumer price inflation did slow in April, it was a much smaller decline than most analysts had expected. As a result, investors’ expectations for the future path of the bank rate increased noticeably in late May, suggesting it could peak at around 5.5 per cent, well above the 4.5 per cent peak that was priced in around late March. Furthermore, rates are also projected to remain higher for longer.

“If maintained, this is likely to exert renewed upward pressure on mortgage rates, which had been trending down after spiking in the wake of the mini-budget in September last year.”

Data from the building society also showed a month-on-month decline of 0.1 per cent in May, with the average cost of a UK home now at £260,736.

Commentators said the property market will continue to be overshadowed by heightened uncertainty over mortgages. Craig Fish, managing director at London mortgage broker Lodestone, said: “Just when you thought the market was stabilising, the inflation data emerged and triggered turmoil in the mortgage market. We were witnessing more normal levels of property activity in May, but there are now concerns about how much higher rates could go. Activity could stagnate moving forward as people take stock. We have already had some clients tell us that their property plans are on hold until things settle down.

“The hope is that as inflation drops, conditions will improve and we could see a strong end to 2023, which should continue into 2024.”

Jason Tebb, chief executive of property search website, said: “Just as a welcome level of stability was returning to the market following the unprecedented uncertainty created by the min-budget in the autumn, something comes along to upset the apple cart.

“The inflation figures, which while moving in the right direction are proving to be more stubborn than first thought, have created volatility in the money markets, resulting in lenders increasing their mortgage pricing.”

Jonathan Hopper, chief executive of buying agents Garrington Property Finders, said: “Less than a week after the Nationwide increased its mortgage interest rates by up to 0.45 per cent, the lender’s latest House Price Index suggests the property market too has yet to settle.

“Its May data shows that average property prices fell in eight out of the past nine months, and prices are now four per cent lower than their peak of August 2022. For now, April’s fleeting price increase looks like a blip rather than the start of a rapid recovery.”

Samuel Mather-Holgate, from advisory firm Mather & Murray Financial, said: “Approvals for house purchases were down in April, and following the events of the past week, with lenders on red alert, activity in the housing market is set to dry up again, as confidence goes from boom to bust.”