House prices in the UK have fallen by 3.8 percent in the 12 months to July, which is the biggest annual drop since July 2009, an index shows.
According to the Nationwide Building Society’s House Price Index, the average house price in July was £260,828.
It’s a slight fall (0.2 percent) from the price in June after seasonal adjustment, but 3.8 percent lower than that in the same month last year, representing the biggest drop in 14 years.
In June, the average house price dropped by 3.5 percent from levels seen in June 2022.
The steep falls partly reflect the historically high house prices seen in 2022.
Robert Gardner, chief economist at Nationwide, said the price of a typical home is now 4.5 percent below the August 2022 peak.
Rising interest rates have made houses less affordable for those who need a mortgage, which in turn hampered demand.
According to Mr. Gardner, a typical first-time buyer with an average income who pays 20 percent deposit would spend 43 percent of their take home pay on monthly mortgage payments today, assuming the mortgage rate is 6 percent.
A year ago, the same buyer would have only spent 32 percent of their disposable income on mortgage payment, while the “long-run average” is 29 percent, he said.
“Moreover, deposit requirements continue to present a high hurdle—with a 10 [percent] deposit equivalent to 55 [percent] of gross annual average income,” he added.
Following the COVID-19 pandemic, the Bank of England (BoE) has raised its base interest rate for 13 times in a row in a bid to rein in runaway inflation.
The rate has increased from 0.1 percent in 2020 to 5 percent on June 22. It’s the highest level since 2008.
Mortgage rates have also increased accordingly. Figures published on July 11 by MoneyfactsCompare showed that the average rate of a two-year fixed mortgage was 6.66 percent, the highest since August 2008, when the number stood at 6.94 percent.
Most economists are expecting the BoE to announce another 0.25 percent rate hike this Thursday, although mortgage rates may not rise further with it if lenders have already factored in the expected base rate increase.
Less Sales Completed
Decreased affordability has led to less sales in housing, Mr. Gardner said, 86,000 housing transactions were completed in June. It’s 15 percent below the levels seen in the same month last year and a 10 percent drop from the pre-pandemic levels.Looking at mortgage approval data, activity is still around 20 percent below 2019 levels, Mr. Gardner said.
However, there was “a slight increase in activity in June,” although most of those applications would pre-date the more recent rise in longer term interest rates, he added.
Despite the weaker demand, Mr. Gardner is optimistic about the prospect of a “relatively soft landing” for the house market because of the low unemployment rate, the stricter stress tests of mortgage borrowers, moderating house prices, and the expectations of a peak in interest rates.
“Unemployment is expected to remain low [below 5 percent], and the vast majority of existing borrowers should be able to weather the impact of higher borrowing costs, given the high proportion on fixed rates, and where affordability testing should ensure that those needing to refinance can afford the higher payments,” he said.
“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, especially if mortgage rates moderate once Bank Rate peaks.”
Speaking to the Treasury Committee last month, bank bosses told MPs that while they were expecting “more financial stress” if higher interest rates remain. Most borrowers had been able to weather the storm.
MPs heard that a low unemployment rate means most people still have options to manage “challenging” costs.
They also heard that current mortgage holders had been stress-tested to make sure they could withstand a higher interest rate of around 6 percent, and new buyers are now facing more stringent affordability stress tests as interest rates rose.
