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UK house prices book first annual contraction in a decade

UK house prices registered the first annual contraction in more than a decade in May as prospective buyers were hit by higher mortgage rates, according to the lender Halifax.

Property prices were 1 per cent down last month compared with May 2022, the first annual fall since December 2012.

Earlier this month, the Bank of England revealed that the average rate for new mortgages rose to 4.5 per cent in April, the highest since 2008. Markets expect the BoE to raise interest rates again at the next monetary policy meeting on June 22 from 4.5 per cent to 4.75 per cent, and are pricing in a move above 5 per cent by the end of the year.

“This will inevitably impact confidence in the housing market as both buyers and sellers adjust their expectations,” said Kim Kinnaird, director at Halifax Mortgages, who expects “further downward pressure on house prices”.

Tom Bill, head of UK residential research at Knight Frank, expects that prices will fall by about 5 per cent this year as “mortgage rates will keep edging up as wage growth keeps core inflation stubbornly high”.

However, he noted that unlike during the financial crisis in 2008-09, the fall in prices would be limited by rising wages, low unemployment, longer mortgages and savings amassed during the pandemic.

Column chart of Annual % change showing Halifax reports first annual drop in UK house prices in more than a decade

Halifax reported that average property prices had now fallen by about £3,000 over the past 12 months and were down about £7,500 from their peak in August. However, prices were still £5,000 up since the end of last year, and £25,000 above the level of two years ago, reflecting the pandemic boom.

The annual drop was driven by existing houses and flats, both down 1.9 per cent, according to Halifax. Terraced and semi-detached houses registered a smaller drop at 1 per cent and 0.5 per cent respectively, while prices of detached houses were marginally up by 0.4 per cent.

Southern England was the worst-performing area, with the South East, the South West and Greater London reporting annual contraction of 1.6 per cent, 1.4 per cent and 1.2 per cent respectively. Instead, the West Midlands continued to be the best performing region with an annual increase of 2.7 per cent.

Earlier this month, the mortgage provider Nationwide reported UK house prices falling by an annual rate of 3.4 per cent in May, the largest drop since 2009. 

Myron Jobson, senior personal finance analyst at investment platform Interactive Investor, said that “the mortgage affordability squeeze not only impacts the dreams of aspiring homeowners but also reverberates throughout the housing market”.

“Discouraged by the uphill struggle, aspiring first-time buyers have found themselves locked out of home ownership, fuelling demand in the rental market,” he added.

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