UK house prices shrink at fastest pace since 2009

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UK house prices contracted at the fastest annual pace since 2009 in August as the impact of higher interest rates hit the property market, according to the mortgage provider Nationwide.

The average house price fell 5.3 per cent last month compared with the same period last year, down from a 3.8 per cent contraction in July and the sharpest fall since July 2009, new data showed on Friday.

House prices were down 0.8 per cent between July and August, taking the average property cost to £259,153, down from a recent peak of £274,000 in August last year.

Robert Gardner, Nationwide’s chief economist, said the rise in borrowing costs “has resulted in activity in the housing market running well below pre-pandemic levels”.

Data released by the Bank of England on Wednesday showed that mortgage approvals fell nearly 10 per cent between June and July. It also showed that the average mortgage rate increased to the highest level since 2008.

The increase in mortgage rates comes as the Bank of England has been battling persistently high inflation, increasing interest rates 14 consecutive times from a record low of 0.1 per cent in November 2021 to the current 5.25 per cent. Markets expect the central bank will increase rates by another quarter point at its next meeting in September.

Alice Haine, personal finance analyst at the investment platform Bestinvest, said the increase in interest rates “means mortgage affordability is now a major challenge for first-time buyers and existing homeowners looking to refinance”.

It is also a challenge for those emerging from cheap fixed-rate mortgages taken out in 2021 who now face significantly higher repayment levels that put stretched disposable household incomes at risk, she added.

Nationwide’s analysis of official data suggested buyers are looking towards smaller, less expensive properties, with a smaller decline in transactions for flats in the first half of this year compared with 2019.

It attributed the trend to the ending of the Help to Buy scheme, which helped those with a smaller deposit purchase a newly built home. Flats have also remained relatively more affordable, it noted, with average prices up by only 13 per cent since the onset of the pandemic, compared with 23 per cent for detached properties.

Andrew Wishart, senior property economist at Capital Economics, said that with mortgage rates set to remain between 5.5 per cent and 6 per cent for the next 12 months, and second-hand supply on the market becoming less tight, “the August data marks the start of a significant further drop in house prices”.

However, Nationwide’s Gardner thinks “a relatively soft landing” for the property market is still achievable because of the unemployment rate, which is expected to remain low, and the high proportion of borrowers on fixed rates.

“While activity is likely to remain subdued in the near term, healthy rates of nominal income growth, together with modestly lower house prices, should help to improve housing affordability over time,” he said.

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