House prices are falling as soaring mortgage rates make property less affordable, according to market analysts. The cost of living crisis has also hit people’s spending power, meaning that they are offering less to buy properties. Property prices rose steeply by about 25 percent across most of the UK from the start of 2020 until Autumn 2022, as a post-Covid boom and a trend to move out of urban centres gave the market a boost.
But now house prices have fallen by nearly 5 percent from their peak, according to figures from the Nationwide Building Society published in July.
Nationwide’s house price index for July showed the largest annual drop in UK house prices in fourteen years. Despite a significant year-on-year dip, the building society’s data shows prices only fell slightly in the month to July, with the average property in Britain now costing £260,828.
The amount of fall is determined by the region, with the largest falls in the South West, and the smallest in Northern Ireland, according to the Nationwide’s figures. Prices in Northern Ireland have not yet returned to levels seen before the 2008 global financial crisis.
In London and the South East, where prices recovered quickly after the global financial crisis, the pandemic saw less growth, but in recent months prices have been higher than ever, with an average property costing £380,000. But activity in the UK housing market has weakened during the first half of 2023, with a slowdown driven by a number of factors, including the cost of living crisis, weaker real incomes and, most importantly, the tightening of monetary policy via higher interest rates.
Higher interest rates mean that new mortgages are more expensive, and current holders of variable rate mortgages are finding that their repayments are going up. The fall in asking prices for properties is arguably a reaction to this situation, but experts say that prices have not yet fallen far enough to balance out the market. The result is an increased shortage of affordable houses for first-time buyers.
According to experts, the market may not balance out until the increase in wages compensates for the higher costs of living and mortgage payments. There is also the question of whether the housebuilding industry can increase to keep up with demand. Regionals shortage of housing has an inevitable effect on prices, so for instance affordability is worst in the South of England, where a first-time buyer can expect to spend more than half of their income on mortgage payments, while in areas like the Midlands, it’s more like a third.
In March, the Office for Budget Responsibility, which advises the government on the health of the economy, predicted that house prices will drop by 10% over the next two years, putting prices back to levels seen in autumn 2021. The question is whether this level will be reached by a gradual decrease, or a sudden crash, possibly triggered by further increases in the interest rates.
According to the think tank Resolution Foundation, if interest rates remain high for the long term, then house prices could fall by around 25 percent over the next five years. Property website Zoopla forecasts that prices will fall by 5 percent in 2023, as it found that demand for homes had fallen by 18 percent in the two months to July.
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