UK house prices recorded their first annual contraction in more than a decade in May as potential buyers were hit by higher mortgage rates, according to lender Halifax.
Home prices fell 1 percent last month compared with May 2022, the first annual decline since December 2012, data showed on Wednesday.
It comes after the Royal Institution of Chartered Surveyors warned on Thursday that expectations of further interest rate rises were likely to add pressure to the market in the coming months.
Tarrant Parsons, an economist at RICS, said “storm clouds have gathered”, with persistently high inflation likely to prompt the Bank of England to take “further action by raising interest rates, leading to higher mortgage rates credits and ultimately reduces affordability and demand from buyers’.
Higher interest rates could dampen the positive trend that saw the RICS house price index improve to minus 30 in May from a recent low of minus 46 per cent in February. The survey measured the difference between the percentage of respondents who see increases and decreases in home prices.
The BoE said the average interest rate on new mortgages rose to 4.5% in April, the highest level since 2008. Markets expect the central bank to raise interest rates again at its next monetary policy meeting on June 22 – from 4 .5 to 4.75% – and prices are moving above 5 percent by the end of the year.
“This will inevitably affect confidence in the housing market as both buyers and sellers adjust their expectations,” said Kim Kinnaird, director at Halifax Mortgages, who also expects “further downward pressure on house prices.”
Tom Bill, head of UK housing research at Knight Frank, predicted prices would fall by around 5 per cent this year as “mortgage rates continue to rise as wage growth keeps core inflation stubbornly high “.
However, he noted that unlike the 2008-09 financial crisis, the fall in prices will be limited by rising wages, low unemployment, longer mortgages and savings built up during the Covid pandemic.
Halifax reported that average property prices fell by around £3,000 over the past 12 months and were down around £7,500 from their peak in August. However, prices were still £5,000 up on the end of last year and £25,000 above the level of two years ago, reflecting the pandemic boom.
The annual decline was driven by existing houses and apartments, both of which fell by 1.9%, according to Halifax. Townhouses and semi-detached houses saw smaller declines of 1% and 0.5% respectively, while detached houses rose marginally by 0.4%.
The South of England was the worst performing region, with the South East, South West and Greater London reporting annual contractions of 1.6%, 1.4% and 1.2% respectively. Instead, the West Midlands continued to be the best performing region with an annual increase of 2.7 per cent.
Earlier this month, mortgage provider Nationwide reported that UK house prices fell by an annual rate of 3.4% in May, the biggest fall since 2009.
Myron Jobson, senior personal finance analyst at investment platform Interactive Investor, said: “Decreasing mortgage affordability is not only affecting the dreams of aspiring homeowners, it’s also reverberating throughout the housing market.”