House prices fall 3.5% and rising interest rates will hit buyer confidence

House prices in June saw a modest rise of just 0.1% – but year-on-year prices are down 3.5%, Nationwide says.

The current average home price stands at £262,239.

First-time buyers are struggling as they need to put down 55% of their gross annual income as a deposit – a slight improvement from late 2022, when it was 59%.

The second quarter of the year painted a gloomy picture for all regions, barring Northern Ireland, as they experienced annual price drops.

East Anglia was hit the hardest, recording a steep 4.7% drop in house prices compared to last year.

‘Underlying inflation in the UK economy’

Nationwide’s chief economist, Robert Gardner, said: “Longer term interest rates, which underpin mortgage pricing, have increased sharply in recent months, in response to data indicating that underlying inflation in the UK economy is not moderating as fast as expected.

“This has prompted investors to expect the Bank of England to increase its policy rate further and for it to remain higher for longer.”

He added: “Longer term borrowing costs have risen to levels similar to those prevailing in the wake of the mini-Budget last year, but this has yet to have the same negative impact on sentiment.

“For example, the number of mortgage applications has not yet declined, and indicators of consumer confidence have continued to improve, though they remain below long run averages.”

‘Ruinous property prices and devastating mortgage rates’

Sarah Coles, the head of personal finance at Hargreaves Lansdown, said: “A toxic cocktail of ruinous property prices and devastating mortgage rates could kill off any lingering optimism over house prices.

“The market held it together in June, but this was before mortgage rate hikes took their toll.”

She added: “With the average two-year fix at 6.37% and the average five-year deal at 5.94%, it puts an enormous dent in affordability, and may well drive a huge number of buyers out of the market.”

Ms Coles also warns there could be a steady flow of forced sales from remortgaging homeowners being forced to sell up.

And with rents rising, she predicts that renters wanting to avoid high rents will still want to buy – but there may not be enough of them to stop ‘serious price falls’.

Other reaction from the world of property:

Director of Benham and Reeves, Marc von Grundherr, said: “Higher interest rates are causing an increased level of unpredictability and the nation’s homebuyers don’t know whether they’re coming or going at present. This is evident when it comes to current house price performance, with property values remaining largely unchanged from one month to the next.”

Managing director of Barrows and Forrester, James Forrester, said: “Borrowing costs have risen significantly in recent months but while they may have reached similar levels to those that followed last September’s shambolic mini-Budget, the market isn’t feeling the same degree of strain and buyer activity is building, albeit at a more measured pace.”

Managing director of House Buyer Bureau, Chris Hodgkinson, said: “For those looking to sell, current market conditions are a tad hit and miss. We’ve seen fluctuating levels of buyer demand in recent months and, with house prices continuing to stutter due to a reduction in buyer purchasing power, many sellers are also unwilling to commit.”

Nathan Emerson, the chief executive of Propertymark, said: “Despite the current economic conditions, our members report only a slight dip in the number of buyers coming to the market when compared to last year when the sales market was in a frenzy. However, many are being more cautious before deciding to make a purchase.”

Jeremy Leaf, a north London estate agent and a former RICS residential chairman, said: “Nationwide provides a long-established and useful indicator of house price movements but this survey has its limitations. It is restricted to the lender’s customers and quite dated so not yet giving sufficient weight to the impact of recent higher than expected increases in the cost of living and interest rates.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Mortgage rates continue to rise although product numbers remain steady. With speculation that base rate could peak anywhere between 5.25 and 6%, on account of stubborn inflation, buyers relying on mortgages are likely to be more price sensitive than in previous months.”

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