UK house prices fell last month at their fastest rate for two and a half years as the fallout from Liz Truss’s disastrous mini-budget put buyers off, according to Nationwide which warned inflation and rising interest rates would weigh on the market in the coming months.
The price of an average home dropped 1.4% to £263,788 in November, according to the building society’s house price index, accelerating a slowdown that saw prices fall 0.9% in October. It was the third monthly decline in a row, and the biggest drop since June 2020.
On an annual basis, annual house price growth slowed sharply to 4.4% in November, from 7.2% a month earlier.
The slowdown in November illustrated the lasting impact of September’s mini-budget, which spooked markets and increased home loan costs. While government borrowing rates have eased since then, average five-year fixed mortgage deals are still hovering at about 5% and the resulting higher costs have continued to weigh on demand.
“While financial market conditions have stabilised, interest rates for new mortgages remain elevated and the market has lost a significant degree of momentum,” Nationwide’s chief economist Robert Gardner said. “Housing affordability for potential buyers and home movers has become much more stretched at a time when household finances are already under pressure from high inflation.”
Nationwide said a larger proportion of people have been priced out of the market and have needed to borrow more money to buy a home.
Inflation hit 11.1% in October – its highest level since 1981 – on the back of soaring bills for energy and food, which have reduced the spending capacity of UK households, including prospective homebuyers.
The slowdown in house prices indicates the market has cooled relative to the strong growth observed during the pandemic, when in the “race for space” people sought larger homes and outside space after UK-wide lockdowns.
Nationwide warned on Thursday that the housing market was unlikely to recover those losses anytime soon, as policymakers at Threadneedle Street ratchet up interest rates further in an attempt to combat climbing prices.
“The market looks set to remain subdued in the coming quarter,” Gardner said. “Inflation is set to remain high for some time and [the] Bank rate is likely to rise further as the Bank of England seeks to ensure demand in the economy slows to relieve domestic price pressures.
“The outlook is uncertain, and much will depend on how the broader economy performs, but a relatively soft landing is still possible.”
However, Gardner said homeowners were still in a relatively strong position, despite the oncoming recession and prospect of higher rates, given that about 85% of mortgages were on fixed-term home loans.
Experts from the EY Item Club said the substantial savings that many households built up during the pandemic would help to soften the blow of higher mortgage rates over the coming months, but agreed further falls in house prices were likely.
While the independent forecaster claimed markets have been overestimating the extent of forthcoming interest rate rises by the central bank, they still expect a 10% drop in average house prices over the next 18 months.
“Market expectations for the peak in the Bank of England rate still looking too hawkish,” said its chief economic adviser, Martin Beck. “The EY Item Club thinks [the] Bank rate will top out at no more than 4% early next year, compared with investors’ current expectations of just under 5%.”
“In addition, the ‘excess’ savings built up by households since 2020 should provide some cushion against rising mortgage rates. Therefore, while the EY Item Club expects average property prices to fall further, the decline should be limited to around 10%.”