Housing market headwinds set to strengthen in near term, says Nationwide

Across the UK, house prices fell by 0.1% month on month and by 3.4% annually in May, Nationwide Building Society said.

A view of homes
A view of homes

The average UK house price recorded its biggest annual fall in nearly 14 years in May, according to Britain’s biggest building society, as it warned that housing market challenges look set to strengthen in the near term.

Property values fell by 3.4% annually in May, marking the biggest drop seen since July 2009 when an annual fall of 6.2% was recorded, Nationwide Building Society said.

The average house price fell by 0.1% month on month, following a 0.4% monthly increase in April.

The average UK house price in May was £260,736, according to Nationwide’s index.

Robert Gardner, Nationwide’s chief economist, said: “Average prices remain 4% below their August 2022 peak.

“Recent Bank of England data had shown some signs of recovery in housing market activity, although the number of mortgages approved for house purchase in March was still around 20% below pre-pandemic levels.”

Mr Gardner continued: “Headwinds to the housing market look set to strengthen in the near term.

“While consumer price inflation did slow in April, it was a much smaller decline than most analysts had expected.

“As a result, investors’ expectations for the future path of (the Bank of England base rate) increased noticeably in late May, suggesting it could peak at (around) 5.5%, well above the (around) 4.5% peak that was priced in around late March.

“Furthermore, rates are also projected to remain higher for longer.

“If maintained, this is likely to exert renewed upward pressure on mortgage rates, which had been trending down after spiking in the wake of the mini-Budget in September last year.”

Mr Gardner added: “Nevertheless, in our view a relatively soft landing remains the most likely outcome since labour market conditions remain solid and household balance sheets appear in relatively good shape.

“While activity is likely to remain subdued in the near term, healthy rates of nominal income growth, together with modestly lower house prices, should help to improve housing affordability over time, especially if mortgage rates moderate once (the Bank of England base rate) peaks.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “With inflation falling, but not as much as forecast, markets are now pricing base rate to peak at 5.5%.

“Subsequent volatility in swap rates, which underpin the pricing of fixed-rate mortgages, means the latter are being pulled at short notice and either withdrawn completely or returning at significantly higher rates.”

Alice Haine, personal finance analyst at investment platform Bestinvest, said: “While the start of the year saw an uptick in market activity amid falling mortgage rates and a robust labour market, storm clouds are gathering once again as interest rates and gilt yields edge ever higher.”

She added: “With the markets now betting on more rate hikes ahead, with interest rates potentially peaking at 5.5% – or worse, higher – as the Bank of England looks to win the battle to tame inflation, this causes problems for the property market.

“The changing interest rate expectations have led to big movements in the bond markets, and as bond yields rise so do swap rates, which lenders use to price home loans.

“It means borrowers must adjust to even higher mortgage rates in addition to persistently high living costs and rising taxes.

“Over the past week, hundreds of residential and buy-to-let mortgages have been pulled from the market as lenders reassess their offers.”

Matt Thompson, head of sales at London-based estate agent Chestertons, said: “We registered more sellers listing their home for sale in May, which provided buyers with a more varied selection of properties.”

Riz Malik, director of Southend-on-Sea-based independent mortgage broker R3 Mortgages, said: “The headwinds the Nationwide refers to have definitely picked up over the course of the past week.

“The current mortgage market volatility we have that was sparked by the inflation data could restrain property transactions moving forward, with rising rates potentially deterring buyers.”

James Forrester, managing director of Birmingham and Lichfield-based estate agent Barrows and Forrester, said: “Those sitting on the fence in anticipation of a return to the pandemic glory days of double-digit price growth will be sitting for some time.

“However, the outlook is broadly positive and while a natural correction was always likely, we are yet to see any inkling of a market crash.”

Myron Jobson, a senior personal finance analyst at interactive investor, said: “While any fall in prices is good news for house-hunters, it might not be enough to meaningfully offset the rising interest rate and its contribution to monthly mortgage payments.

“The stark reality is owning a home appears to be a distant dream for many, with high mortgage rate rates, high property prices and a higher cost of living, including climbing rents, making buying a home an increasingly difficult prospect.”

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