House prices down as mortgage crunch takes its toll

Britain’s house prices declined 3.5% in June on the year, slightly down on May’s 3.4% drop as soaring borrowing costs and stubbornly high inflation dented affordability levels.

The data was broadly flat over the month, however, with prices rising 0.1% in June once seasonal effects are factored in, taking the average house price to £262,239.  

Softening prices are to be expected when you consider the turmoil that has engulfed the mortgage market in recent weeks. Hotter-than-hoped for inflation data forced the Bank of England to raise interest rates by 50 basis points last week, increasing the upwards pressure on mortgage rates in the process. 

With average mortgage rates hitting 6.37% for a 2-year fix and 5.94% for a 5-year fix, first-time buyers and homeowners looking to refinance soon have a challenging time ahead. Britain is now in the grip of one of the worst mortgage squeezes in history, and with no easy solutions on the table a good independent mortgage broker will be the must-have accessory of the summer. 

As the markets bet on more rate hikes this year, with interest rates potentially peaking at 6% – or even higher – as the BoE battles to extinguish the persistent inflation fire, the property market is in for a rough ride. Worsening 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.   

For borrowers this means absorbing significantly higher mortgage rates at a time when their finances have already been battered by a cost-of-living crisis and rising taxes. Borrowers on variable rates are the hardest hit at the moment as they typically receive an instant rise in their mortgage repayments as interest rates increase.

However, most UK mortgages are fixed with the 800,000 homeowners set to emerge from cheap fixed-rate deals in the second half of this year, and the 1.6 million in 2024, all facing the same reality – a sharp rise in repayments. 

Looking ahead, house price falls are likely to accelerate as the gap between asking prices and what buyers can afford to offer widens. Sellers keen to move quickly must therefore price their homes at a realistic level if they want to secure a sale.

Alice Haine is personal finance analyst at Bestinvest