'Storm clouds now gathering!' House prices falling at their fastest rate in 14 years
House prices have fallen at the fastest rate in 14 years as economic headwinds blow the UK property market off course, Britain's biggest building society has warned.
Rising interest rates and consumers battling a cost-of-living crisis has sparked the biggest annual fall in values since the aftermath of the global financial crash.
Sellers face a tough market as more than £9,000 has been wiped off the price of a three-bed semi over the last 12 months.
Property values fell by 3.4 percent annually in May, marking the biggest drop seen since July 2009 when an annual fall of 6.2 percent was recorded, according to new analysis by the Nationwide Building Society.
The average house price fell by 0.1 percent month on month to £260,736. In May 2022, the typical house price was £269,914.
In another blow to the market, the Bank of England announced mortgage approvals for house purchases fell from 51,500 in March to 48,700 in April.
And mortgage lending fell £1.4bn in April – the biggest drop outside the pandemic and driven by a drop in new lending.
READ MORE: Housing market slowdown likely to be 'longer and deeper' as home sales plunge
Alice Haine, personal finance analyst at Bestinvest, said: “Storm clouds are gathering once again as interest rates and gilt yields edge ever higher.
“The markets are now betting on more rate hikes ahead, with interest rates potentially peaking at 5.5 percent – or worse, higher – as the Bank of England battles to tame inflation.
“This causes problems for the property market as borrowers must adjust to even higher mortgage rates in addition to persistently high living costs and rising taxes.
“Over the past week, hundreds of residential and buy-to-let mortgages have been pulled from the market as lenders reassess their offers.”
The Bank of England base rate is now 4.5 percent as the Bank struggles to rein in soaring inflation. It was just one percent last May and at its lowest was just .25 percent in December 2021.
The hikes have added hundreds of pounds a month to the mortgage bills of millions of homeowners.
Cheaper deals are also going to get harder to find as lenders have pulled close to 800 mortgage deals from the market ahead of further rises in the base interest rate.
Some 14 lenders have pulled close to 400 fixed-rate residential deals, with three lenders pulling their entire fixed range, according to analysts Moneyfacts.
The average interest rate for a residential fixed-rate mortgage has risen from 5.34 percent to 5.38 percent.
Average mortgage rates could peak at 5.7 percent in early 2024 with a house price fall of eight percent, analysts at Capital Economics said.
Jason Ferrando, founder of easyMoney, said: “The threat of yet another interest rate hike this month could prove problematic.
“The ever-escalating cost of borrowing is already proving a sizeable hurdle and one that is causing buyers to tread more tentatively.”
The latest Nationwide data show average property prices have fallen in eight out of the past nine months.
The decline comes as predicted rises in interest rates put pressure on the market.
The Bank of England is now expected to increase interest rates to 5.5 percent by the end of the year, after latest data revealed that UK inflation is not easing as quickly as hoped.
The Consumer Prices Index rose by 8.7 percent in the 12 months to April, down from 10.1 percent in March. The key driver of inflation is soaring food prices, which stand at a 45-year high.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “With inflation falling, but not as much as forecast, markets are now pricing base rate to peak at 5.5 percent.
“Subsequent volatility in swap rates, which underpin the pricing of fixed-rate mortgages, means the latter are being pulled at short notice and either withdrawn completely or returning at significantly higher rates.”
However other economists fear interest rates could climb as high as six percent to curb rampant inflation.
The last time rates were this high was January 1999.
Willem Buiter, who was a member of the BoE’s Monetary Policy Committee, has warned that steeper rate rises would be needed to stamp out inflation.
Mr Buiter said he anticipated a peak of “no less than six percent”, adding: “They’re going to have to go significantly higher. There’s no way in which a 4.5 percent policy rate will do the job.”
Robert Gardner, Nationwide’ chief economist, said: “Average prices remain four percent below their August 2022 peak.
“Recent Bank of England data had shown some signs of recovery in housing market activity, although the number of mortgages approved for house purchase in March was still around 20 percent below pre-pandemic levels.
“Headwinds to the housing market look set to strengthen in the near term.
“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 base rate increased noticeably in late May, suggesting it could peak at around 5.5 percent, well above the 4.5 percent peak 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.”
James Forrester, managing director of Birmingham and Lichfield-based estate agent Barrows and Forrester, said: “Those sitting on the fence in anticipation of a return to the pandemic glory days of double-digit price growth will be sitting for some time.
“However, the outlook is broadly positive and while a natural correction was always likely, we are yet to see any inkling of a market crash.”
COMMENT BY DAVID HANNAH
Any fall in property prices is not a welcome sign.
Rising interest rates put pressure on affordability, which increases the risk of a property price decline.
Homeowners coming off cheap fixed-rate deals – perhaps as low as two per cent – and moving onto a mortgage at the current base rate of 4.5 per cent or even higher are going to be unable to afford them.
We’ve also seen the re-introduction of 100 per cent mortgages, which mean buyers have no equity and are likely to find themselves in negative equity shortly after buying.
That’s going to lead to a load of repossessions and forced sales which is not good news and is likely to have further impact on the wider economy.
Added to which, confidence in the market will be shattered.
And an influx of first-time buyers set to take advantage of falling prices is unlikely if mortgage costs soar as the Bank of England continues to increase interest rates.
Higher interest rates will also have a knock-on effect on the rental market too. There is already a critical lack of supply, and now, with a growing number of would-be buyers in need of a place to live, this is going to be exacerbated further.
Rents will become more expensive as landlords have to cover their mortgage costs – just as people are already struggling with rising energy and food prices.
Sellers will also play a part in dampening the market as they will have to rein in their ambitions and price their properties realistically if they want to achieve a sale.
As lenders withdraw their cheaper rates – which are already more expensive than they were 18 months ago – in anticipation of the upcoming interest rate announcement, budgets will be stretched for buyers. Arguably, the hardest hit will be owners coming to the end of their fixed rates.
They will have little choice but to pay more every month.
Economists are predicting the base rate at 5.5 per cent. That means lenders offering deals at that rate and higher.
Owners could see rates of six and seven per cent.
After years of rising property values and falling interest rates, buyers and sellers are in for a rough ride.
- David Hannah, the Group Chairman of Cornerstone Tax.
