UK house prices fell by 0.1% month-on-month in May, causing the annual rate of house price growth to slip to -3.4% from -2.7% in April, according to the latest figures from Nationwide.
The average house price, not seasonally adjusted, now stands at £260,736, a minor increase from £260,441 in April.
Robert Gardner, Nationwide’s chief economist, provided insight into the shifting housing market. “After tentative signs of improvement in April, annual house price growth softened again in May, falling back to -3.4%,” he said.
This decrease comes despite early signs of a recovery in housing market activity. Bank of England data revealed some improvement, even though the number of mortgages approved for house purchases in March still languishes around 20% below pre-pandemic levels.
However, Gardner warned of potential headwinds in the housing market, driven by unexpected slowdowns in consumer price inflation. He said: “As a result, investors’ expectations for the future path of the Bank Rate increased noticeably in late May, suggesting it could peak at around 5.5%, well above the 4.5% peak that was priced in around late March. Furthermore, rates are also projected to remain higher for longer.”
He continued: “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.”
Despite these challenges, Gardner maintains an optimistic outlook, predicting a soft landing for the housing market. He cited robust labour market conditions and resilient household balance sheets as supporting factors.
“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 Bank Rate peaks,” he added.
Reaction
James Briggs, head of personal finance intermediary sales at specialist lender at Together:
“After a brief glimmer of a housing market recovery, May figures fell by 0.1% as caution around possible further interest rate rises kicked in.
“However, with inflation falling to 8.7%, and finally out of double digits, we are seeing more prospective house sellers are listing their homes, albeit with realistic prices attached given current demand.
“In the coming weeks, hopeful buyers and existing borrowers will continue to keep a close eye on the wider UK economic performance and impact of cost of living to the property market. Working with a specialist lender who can advocate for multiple and flexible routes onto the property ladder including right to buy mortgages and shared ownership in the high-cost environment is certainly worth considering.”
Mark Harris, chief executive of mortgage broker SPF Private Clients:
“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.
“Borrowers should not panic but seek advice from a whole-of-market broker and book a rate in advance of when they need it if they are worried. If rates fall by the time you come to take out your mortgage, you should be able to opt for a cheaper one.”
Sarah Coles, head of personal finance at Hargreaves Lansdown:
“House prices fell back very slightly in May, but this is a drop in the ocean compared to the flood of bad news that may lie in store if mortgage rates continue rising.
“The change in May is largely due to the seasonal adjustment – because prices were broadly flat. What matters is what comes next.
“Confidence had been slowly building in the property market this spring, as buyers and sellers convinced themselves that the horrors of inflation could be coming to an end, and that mortgage rates might continue to fall. However, higher core inflation figures raised expectations that interest rates may have to keep rising, which forced hundreds of mortgage products to be withdrawn from the market, and major lenders to hike rates. It may well have brought confidence crashing down.
“This isn’t going to be a repeat of the horrors we saw in the aftermath of the mini-Budget. The market hasn’t been rocked to anything like the same extent. There’s also the chance that it has overreacted, and rate expectations start to fall back. However, we’re likely to see mortgage rates move higher in the immediate future.
“We’re unlikely to see an overnight impact, because people still have mortgages in their back pockets, but we can expect this to filter through into less demand, lower sales, and weaker prices.
“There are still some positives to cling onto. The Bank of England data shows mortgage approvals picked up in both February and March, so there are more buyers around, who are already armed with mortgage agreements. However, we need to put this into perspective, because approvals were still 20% below pre-pandemic levels.
“Meanwhile, jobs data still shows robust employment numbers, with an unemployment rate of 3.9% in March. While people are secure in their jobs, even in a tough market, there will be people who are still prepared to buy.
“However, if you’re on the hunt for a home right now, it’s still well worth pushing for a good deal, to build yourself a cushion if prices fall further in the months ahead.”
Jeremy Leaf, north London estate agent and a former RICS residential chairman:
“Just as with HMRC’s disappointing but hardly surprising transactions numbers, this respected house price index is also a little historic.
“The figures reflect what was happening not just after the mini-Budget in September when so much activity paused but also the improvements since.
“Continuing worries about the cost of living highlighted in the recent core inflation numbers are compromising confidence and having a knock-on effect on mortgage cost and availability, inevitably leading to a softening of property prices.”
Rohit Kohli, director at Romsey-based mortgage broker, The Mortgage Stop:
“May was a solid month overall but, after the latest inflation data, ended on a mad note. The rest of 2023 now looks uncertain. The long wait until the next Bank of England interest rate meeting on 22 June could fuel speculation and promote caution among prospective buyers. Increased borrowing costs amid the current upheaval in the mortgage market could discourage potential buyers, slowing the market further.
“If the base rate rises to 5% or even 5.5%, the impact on sentiment and demand could be significant. Higher costs could reduce affordability, potentially suppressing activity and lowering house prices. This could also increase arrears and repossessions as homeowners shift onto higher payments.”
Kundan Bhaduri, director of London-based property developer and portfolio landlord, The Kushman Group:
“May was moving along nicely until last week’s inflation data rattled the mortgage market, prompting lenders to withdraw and increase rates across the board. This will have a profound impact on demand, affordability and the overall dynamics of the property market for the rest of 2023. Uncertainty surrounding inflation, interest rates and the economy will temper buyer sentiment.
“This latest disruption in the mortgage market, with higher borrowing costs and reduced access to financing, will deter potential buyers and place even more emphasis on affordability, which means borrowers are likely to have to put in larger deposits. This makes the market tougher for first-time buyers and less attractive for investors.
“The one thing we can all be certain of is that while house price growth will slow down in 2023, house prices will continue their steady climb upwards soon enough given the intrinsic demand in our economy, the entrenched lack of supply and the relative strength of the jobs market. Overall, despite this latest mortgage market turmoil, we remain bullish.”
Ross McMillan, owner at Glasgow-based Blue Fish Mortgage Solutions:
“May started encouragingly and then swerved violently in the past week or so from relative stability to wild instability within the blink of an eye. How this recent shock to borrowers’ systems impacts the overall housing market in the near future is difficult to gauge but anecdotally, appetite from first-time buyers in particular remains stubbornly strong so far. In Scotland, seemingly across most areas, there has been no real sign of any significant fall in prices and, whilst the number of buyers may be less overall, a percentage above the home report value remains the expected norm.
“Ongoing turmoil and uncertainty around rates and availability of products is, however, a hammer blow to any thoughts of recovery in the buy-to-let sector, which now seems set for a long period on the naughty step whilst lenders and investors consider their next moves.”
Craig Fish, managing director at London-based mortgage broker Lodestone:
“Just when you thought the market was stabilising, the inflation data emerged and triggered turmoil in the mortgage market. We were witnessing more normal levels of property activity in May, but there are now concerns about how much higher rates could go.
“Activity could stagnate moving forward as people take stock. We have already had some clients tell us that their property plans are on hold until things settle down. The hope is that as inflation drops, conditions will improve and we could see a strong end to 2023, which should continue into 2024.”
Riz Malik, director of Southend-on-Sea-based independent mortgage broker, R3 Mortgages:
“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.
“If the Base Rate heads above 5%, all bets are off, potentially inducing a property market slowdown. Projecting property market trends is difficult, but unless there is some substantial positive news, higher interest and mortgage rates could prompt a reduction in transactions during the rest of 2023 and see prices cool further.”
Graham Cox, founder of the Bristol-based broker, SelfEmployedMortgageHub.com:
“May opened strongly, but the market has cooled noticeably since last week’s inflation figures were released. Despite the mixed signals from Nationwide and Halifax, property prices are falling, as evidenced by the Land Registry figures reporting five consecutive months of decreasing prices.
“Equally, transactions in April this year were down a quarter on April 22. So demand is falling as supply is increasing due to the spring rush. Property prices are likely to start falling more sharply between now and the end of the year, especially once it becomes clear prices are indeed, dropping. That will cause buyers to hold off in the expectation of further falls.”
Oliver Fish, director of London-based luxury estate agency, Oliver James: “
May saw a lot of activity in Central London with international buyers, in particular high net worths from the Middle East, coming to the capital in big numbers to take advantage of the recent softening of the market and invest here securely for the long term. We’ve seen landlords selling up their rental properties as the buy-to-let market becomes less attractive to investors with the cost of borrowing and increased legislation.
“Buyers that require borrowing are having to look in a lower price range due to the increase in mortgage costs. I expect mortgage rates may well go up further in the region of 0.25%, house prices to stabilise over the coming months and confidence to slowly creep back as we adapt to an even more expensive rate environment. My guess is that over the next couple of years the base rate will come down, better mortgage deals will appear and property will start heading the way it always does, namely up.”
Tomer Aboody, director of property lender MT Finance:
“As more positive signs were showing in the first few months of the year, this slowdown is a sign of continued uncertainty in the market, with rate rises continuing and possibly hitting a much higher peak than originally indicated.
“As the Bank of England struggles to get inflation under control, many sellers and buyers are holding off to see what the next few months have in store. Should we then see a halt to consecutive rate rises, this will give them more confidence to proceed.
“Some Government intervention in the housing market will be expected in the next few months in order to push the economy in a more positive direction, as the general election will come around very quickly.”
Jonathan Hopper, CEO of Garrington Property Finders:
“Less than a week after the Nationwide increased its mortgage interest rates by up to 0.45%, the lender’s latest House Price Index suggests the property market too has yet to settle.
“Its May data shows that average property prices fell in eight out of the past nine months, and prices are now 4% lower than their peak of August 2022. For now, April’s fleeting price increase looks like a blip rather than the start of a rapid recovery.
“While the rising cost of borrowing is pushing affordability further out of reach for many first-time buyers, the sustained cooling of prices is serving as an unambiguous buy signal for those at the top end of the market, who tend to be less reliant on mortgage borrowing.
“As the number of homes for sale creeps up, improving supply has created a strong buyer’s market in some areas. Proceedable buyers who have their finances already in place are often finding themselves in the enviable position of having sellers clamour for their attention and even agreeing to a sizeable discount just to get a deal done.
“Nevertheless, figures from HMRC show the number of property purchases completed in April fell sharply compared to March, and the traditional spring bounce was nowhere to be seen in 2023.
“But as we move into summer, more would-be buyers are coming out of the woodwork, tempted by the sense that there are bargains to be had and willing to take a longer-term view, rather than worrying about how prices might move over the next month or two.
“While prices are likely to meander for the rest of 2023, the simultaneous improvement of both demand and supply should slowly help the market to become stabler and more free-flowing.”
Iain McKenzie, CEO of The Guild of Property Professionals:
“The slowdown in house price growth continues, albeit not at the pace that some buyers may be hoping for.
“It’s clear that there has been a readjustment in the market during the first half of the year, which is unsurprising considering the economic challenges facing the country.
“Prices are levelling off though, and this stability should bring reassurance not only to sellers, but also to buyers that may be worried about their home losing value as soon as they sign on the dotted line.
“Property sales are struggling to live up to the frenzied scenes we were seeing this time last year but with mortgage offers picking back up again, the outlook for the rest of the year could be brighter.
“This will improve further still if more lenders offer 100% mortgages, which can help buyers paying extortionate rental rates to get on the ladder by removing the struggle to save for a deposit.
“The affordability factor is a real barrier for first-time buyers, and as house price growth levels off, punitive living costs need to be addressed before confidence in buying can be fully restored.”
