Interest rate scare deflates UK house prices but rents on the rise

House prices across the UK are still falling, according to the Royal Institution of Chartered Surveyors (RICS), as looming interest rate hikes take their toll.

The sector saw some sales improvement last month, however, further interest rate hikes from the Bank of England (BoE) could stifle the sector, RICS warned.

According to its UK residential market survey, new buyers enquiries and agreed sales had their least negative readings in 12 months. The average agent had 38 properties on their books – the long-term average being 40.

The net headline balance for new buyer enquiries came in at -18% in May. Although this indicates a subdued trend in demand, the latest reading is up from a net balance of -34% in April. It was the least negative figure in a year.

Meanwhile, the agreed sales indicator returned a net balance of -7%, noticeably less downbeat than figures of -29% and -18% seen back in March and April respectively. New instructions were up for the first time since early 2022.

Read more: UK house prices fall for first time since 2012

Respondents in Scotland and Northern Ireland saw an uplift in house prices while prices continued to fall in most English regions. The net balances across the East Midlands (-68%) and the South East (-48%) seated most deeply in negative territory.

“It seems storm clouds are gathered, with the UK's stubbornly high inflation likely undermining the recent improvement in activity by prompting the Bank of England to take further action through interest rate rises, leading to higher mortgage rates and ultimately reducing affordability and buyer demand,” RICS senior economist, Tarrant Parsons, said.

“The banking sector appears to expect this with many banks and building societies already introducing products with higher interest rates.”

Read more: UK mortgage approvals slump after interest rate hikes

In the lettings sector, RICS revealed that demand still outstripped supply, with further pressures placed on availability as interest rate rises and proposals to abolish Section 21, among other changes contained in the UK Government’s Renters (Reform) Bill, encourage landlords to sell up.

With rents rising rapidly, RICS expects these increases to average 6% in the coming years.

“May was the calm before the storm, and even that was pretty dreary – with demand, house prices and sales falling. Mortgage rate hikes in the past two weeks will pile on more misery for the property market in the months to come, depressing demand and stifling sales. But it’s not just sellers who face a wretched summer, rising rates will also bring more grief for renters too,” said Sarah Coles, head of personal finance at Hargreaves Lansdown.

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“Towards the end of the month, the Bank of England revealed that inflation was stickier than had been expected, which rapidly raised interest rate expectations. These have been feeding through into higher fixed-rate mortgages ever since. The average 2-year fixed mortgage is now around 5.75% – up from around 5.3% before the inflation figures were announced.

“There’s every chance this will persuade buyers that this isn’t the climate to buy in. Halifax figures out yesterday showed house prices were flat in May, while Nationwide figures showed them falling. At times like this, buyers may think there’s less risk in waiting to see what happens to rates and prices before taking the plunge. Given that rates are expected to remain higher for months, this could seriously dent the market as we go through the rest of 2023.”

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