Mortgage rate hikes behind drop in UK house prices, Nationwide finds

Rising mortgage costs prompted a decrease in UK house prices in April, the latest Nationwide House Price Index (HPI) has found.

Average property prices fell 0.4% once seasonal effects were taken into account, with a typical home now costing almost £262,000. This figure is more than £11,500 (4%) below the record high recorded in August 2022, but remains roughly a fifth higher than pre-Covid average prices.

It comes as mortgage rates have been hiked by most of the UK’s biggest lenders. The average two-year fix now sits at 5.91%, according to Moneyfacts, approaching a level not seen since the turn of the year. The increases have come amid ongoing uncertainty around when the Bank of England will move to cut interest rates, with wage growth figures and inflation data still higher than market expectations.

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Other HPIs have painted a similar picture, with Zoopla recently showing prices fell back slightly in March. But the property listing website also saw signs that buyer sentiment is improving with the number of agreed sales on the up. Likewise, Rightmove found asking prices were rising last month.

Nationwide: ‘affordability pressures’ hitting UK house prices

According to the building society’s HPI for April, house prices grew 0.6% (£800) in real terms compared to April 2023. However, once the effects of the annual housing market spring bounce were taken into account, the average increase turned into a 0.4% reversal. It was a similar story last month, when prices were 1.6% up numerically year-on-year, but down 0.2% after being revised to account for seasonal effects.

Reacting to the findings, Nationwide’s chief economist Robert Gardner said: “The slowdown likely reflects ongoing affordability pressures, with longer term interest rates rising in recent months, reversing the steep fall seen around the turn of the year.” He added that these cost issues are particularly impacting first-time buyers.

He pointed to a poll conducted by Censuswide for Nationwide in mid-March when mortgage rates were starting to creep up. Of the 1,000 prospective first-timers interviewed, 49% said they had delayed their plans to buy over the past year. Among this group, 53% were delaying because house prices are “too high”, while a further 41% said higher mortgage costs were stopping them from buying a first property.

More than two-thirds of those who were polled said they had between £0 and £10,000 saved towards a deposit, well-short of the £22,000 that Nationwide said constitutes a 10% deposit on a typical bottom-rung home. Another 84% said the cost of living crisis had impacted their plans to purchase because, for example, they were struggling to save enough for a deposit.

Recent research by Go.Compare found that the current average UK salary is only enough to afford a flat, with a typical property requiring a prospective homeowner to earn £20,000 above the national average wage. This could prove to be problematic for the market as a whole given Halifax found smaller homes were driving market growth in the year to February.

Is the house price drop temporary?

While the fall in house prices on the Nationwide HPI once again confounded market expectations (the consensus had been that there would be a small 0.2% increase in April), there is an expectation that prices and market activity will pick up again soon.

Capital Economics’ assistant economist Imogen Pattison said mortgage affordability constraints should ease as she expects the Bank of England will cut interest rates.“In the coming months, we suspect mortgage rates will hover around their April level, keeping demand subdued. We expect that will prevent renewed gains in house prices in the near term,” she said. “But if we are right to think that Bank Rate will be cut further than most expect this year, mortgage rates should fall to just over 4% by the end of 2024, leaving house prices up 3% year-on-year.”

Sarah Coles, head of personal finance at Hargreaves Lansdown, disagrees with Pattison’s expectation that a rate drop will be significant enough to turn the tide. Describing Nationwide’s figures as an “April washout”, she said: “Those who were optimistic about an imminent cut in rates at the start of this year will be getting increasingly frustrated. And things aren’t set to get any easier in the immediate future either, because the market isn't expecting rate cuts until August or September – although June can’t be ruled out entirely. It's also expecting just two or three cuts this year, so we’re not going to see massive movements in mortgage rates.”

However, Coles said prices could “eke out some growth regardless” as buyers may “take the plunge” anyway. She added: “It’s why we’re seeing mortgage approvals continue to rise. However, we might not get a significant pick up in prices until mortgage rates start to feel substantially different.”