In July, the average house prices in the UK dropped at the fastest rate in 14 years, according to the Nationwide Index. Property values fell by an average of 3.8 per cent in the year leading up to July, which is the lowest figure since July 2009.
In July alone, house prices decreased by 0.2 per cent, bringing the average price to £260,828. This means that the price of a typical home is now 4.5 per cent below the peak in August 2022.
Robert Gardner, the chief economist of Nationwide, explained that the uncertainty about UK interest rates has been causing fluctuations in investor views. Although expectations have slightly moderated in recent weeks, long-term interest rates, which influence mortgage prices, are still higher than usual.
As a result, buying a home with a mortgage has become less affordable for many people. For instance, a prospective buyer with an average wage and a 20 per cent deposit on a typical first-time buyer property would see their monthly mortgage payments account for 43 per cent of their take-home pay, assuming a six per cent mortgage rate. This is up from 32 per cent a year ago and well above the long-run average of 29 per cent. Additionally, the requirement for large deposits remains a significant obstacle, with a 10 per cent deposit equivalent to 55 per cent of the gross annual average income.
Despite these challenges, Robert Gardner believes that unemployment will remain low, and most existing borrowers should be able to handle higher borrowing costs.
The Bank of England’s base rate is currently at five per cent, and it is expected to potentially rise further in an effort to control inflation. However, there is hope that healthy rates of nominal income growth and modestly lower house prices will eventually improve housing affordability, especially if mortgage rates stabilize once the base rate peaks.
Some lenders, including HSBC, Barclays, and Nationwide, have already reduced their fixed-rate mortgage pricing due to better-than-expected inflation news. This has led to a calming of swap rates, which impact fixed-rate mortgage pricing, after a period of considerable volatility.
Despite the challenges, the property market remains relatively resilient. Demand for houses is expected to be more resilient than anticipated, and factors such as wage growth, housing equity, lockdown savings, longer mortgage terms, lender forbearance, and fixed-rate deals contribute to this.
Property professionals’ reports suggest that the market is returning to a more normal pace despite ongoing economic turbulence. In London, the property market remained stable in July, with buyer registrations similar to previous months. While first-time buyers relying on family support declined, there was an increase in cash buyers and higher-valued property sales exceeding £1 million.
Looking ahead, experts have varying opinions on the future of house prices. Some predict further falls in prices, while others hope for a soft landing if inflation continues to decrease and the jobs market remains strong. Sellers may need to adjust their pricing expectations, and buyers might need to be patient and flexible in the current market conditions.