Nationwide: house price growth sees its biggest drop since 2009

According to Nationwide’s latest house price index reading, house prices fell at their fastest pace in almost 14 years in May.

Overall, house prices contracted by -3.4% in May compared to the same period last year, according to the building society.

“However, this largely reflects base effects with prices broadly flat over the month after

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taking account of seasonal effects,” said Robert Gardner, chief economist at Nationwide. “Average prices remain 4% below their August 2022 peak.”

In May house prices fell by 0.1% month-on-month, taking the average price of a home to £260,736.

The challenging environment is due to continue

The challenges facing the housing market only look set to continue in the coming months.

Inflation is one of the biggest headwinds facing the market.

While the rate of inflation did slow modestly to 8.7% in March, food prices remain significantly elevated, suggesting the headline CPI figure could remain high for the foreseeable future.

As a result, investors expect the Bank of England (BoE) to continue hiking interest rates, with some analysts suggesting the base rate could peak at 5.5% this year - up from previous projections of 4.5%.

“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,” says Gardner.

The average rates on two-year fixed mortgages have risen from 5.26% in early May to 5.38% by the end of the month, while the rates on five-year fixed mortgages have also climbed from 4.97% to 5.05% in the same time period, according to Moneyfacts.

Additionally, lenders have begun to pull deals from the market due to uncertainty around interest rates. According to Moneyfacts, the number of mortgages on the market has fallen from 5,385 deals to 5,012 since the start of last week.

What do rising interest rates mean for mortgages?

“With the markets now betting on more rate hikes ahead, with interest rates potentially peaking at 5.5% - or worse, higher - as the BoE looks to win the battle to tame inflation, this causes problems for the property market,” says Alice Haine, personal finance analyst at Bestinvest.

“The changing interest rate expectations have led to big movements in the bond markets, and as bond yields rise so do swap rates, which lenders use to price home loans.”

Borrowers will have to adjust to higher repayments while also dealing with the higher cost of living and an increase in taxes.

Homeowners on variable or tracker mortgages will suffer the most, as their payments go up in line with BoE hikes. Meanwhile, those on fixed-rate products who are coming to an end will have to remortgage at a much higher rate.

As for first time buyers, “there are a few options”, says Haine. One is to lock in a deal now before rates go up or to delay moving plans.

But in doing so they are at the mercy of record high rents, which will eat into savings at a time when many are already struggling to put enough money together for a deposit.