UK house prices dip 3.4% YoY in May amid rising interest rate concerns

UK house prices experienced a 3.4% drop year-on-year in May, according to data from Nationwide, one of the country’s largest mortgage lenders. The average cost of a UK home now stands at £260,736, with a month-on-month decline of 0.1%. Nationwide had previously observed tentative signs of market recovery in April, with a 0.4% rise in monthly prices and an improvement in the annual rate from -3.1% in March to -2.7%.

Nationwide’s chief economist, Robert Gardner, explained that the latest data “largely reflects base effects with prices broadly flat over the month after taking account of seasonal effects.” However, he noted that average prices are still 4% below their peak in August 2022. Bank of England data has shown some recovery in housing market activity, but the number of mortgages approved for house purchases in March remains about 20% below pre-pandemic levels.

Gardner highlighted that expectations of the Bank of England raising interest rates again, along with projections of higher rates for longer, would probably increase pressure on mortgage rates. However, he remains optimistic about the long-term affordability of homes, stating, “a relatively soft landing remains the most likely outcome since labour market conditions remain solid and household balance sheets appear in relatively good shape.”

Alice Haine, personal finance analyst at investment platform Bestinvest, expressed a more pessimistic view, citing rising interest rates and gilt yields as factors contributing to “storm clouds” gathering over the property market. She explained that the changing interest rate expectations have led to significant movements in the bond markets, which in turn affect swap rates used by lenders to price home loans. As a result, borrowers may face higher mortgage rates along with high living costs and increasing taxes.

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, agreed that Nationwide’s data for May suggested buyers “are struggling with affordability.” She added that while Rightmove’s measure indicated a 1.4% increase in asking prices in May, it does not reflect the final price accepted by sellers. Dickens believes the downward trend in house prices may continue for some time.