UK house prices suffer biggest fall in more than a decade as higher interest rates bite

UK house prices registered the largest decline in more than a decade last month as higher interest rates and the wider cost of living crisis hit demand, according to a closely watched survey.

Property prices fell 1.1 per cent in February compared with the same month last year, the biggest drop since November 2012, and a reverse of a 1.1 per cent increase in January, mortgage provider Nationwide said on Wednesday. Economists polled by Reuters had expected a fall of 0.9 per cent.

It was the first annual contraction since June 2020 when the housing market was effectively shut during the Covid-19 lockdown. Robert Gardner, Nationwide’s chief economist, said the drop in prices reflected low buyer confidence “as well as the cumulative impact of the financial pressures that have been weighing on households for some time”.

The weak state of the housing market was underlined by separate Bank of England data that showed mortgage approvals for house purchases fell to 39,600 in January, down from 40,500 the previous month and the lowest since May 2020. Excluding the onset of the Covid-19 pandemic, this was the lowest level of approvals since January 2009, when Britain was mired in recession following the banking crisis.

Separately, Persimmon, one of the UK’s largest housebuilders, warned on Wednesday that sales of new homes could fall as much as 40 per cent this year if high mortgage rates and economic uncertainty continued to depress buyer demand.

The average interest rate on new mortgages rose to 3.9 per cent in January, the highest since 2010, BoE data showed, with the markets still anticipating further rises in interest rates as the central bank seeks to rein in inflation.

The average house price fell to £257,406 in February, down from a peak of £273,751 in August, but still £41,000 above level of January 2020, before the pandemic hit.

House prices were down 0.5 per cent on January, the sixth consecutive monthly decline since the August peak, marking the longest period of contraction since 2009.

Adjusted for inflation, house prices have fallen 11 per cent from their peak and are below their pre-pandemic level, which compares with a fall in real terms of 19 per cent between 2007 and 2009, according to Andrew Wishart, senior property economist at Capital Economics.

Luke Thompson, mortgage adviser at PAB Wealth Management, said: “[Sellers] have had to become more accustomed to the fact that they may not achieve the full asking price for their property as we aren’t seeing multiple people bidding for a property like we were at the end of 2021 and into 2022.”

Many economists think the slowdown in the property market will continue for some months. “It will be hard for the market to regain much momentum in the near term since economic headwinds look set to remain relatively strong,” Gardner said.

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said house prices would “continue to decline over the next six months or so, resulting in a peak-to-trough fall of about 8 per cent”. However, she expected house prices to return to expansion in 2024 if the BoE started reducing interest rates and energy price pressures eased.

Nationwide tracks house prices based on the mortgage it issues, providing the most timely measure of property values.