UK House Price Fall Quicker Than Expected With Higher Rates

UK house prices fell at the sharpest annual pace since 2009 after surging interest rates increased the cost of borrowing, one of the biggest mortgage lenders said.

(Bloomberg) — UK house prices fell at the sharpest annual pace since 2009 after surging interest rates increased the cost of borrowing, one of the biggest mortgage lenders said.

The average cost of a home fell 3.1% from a year ago in March, steeper than the 2.2% drop expected by economists, Nationwide Building Society said Friday. Prices have fallen 4.6% from their peak in August, bringing the average value to £257,122 ($318,320). 

The figures add to evidence that the Bank of England’s rate increases are slowing a market that remained buoyant through the recession that accompanied the pandemic. The central bank raised its key rate to 4.25% in a series of steps from near zero at the close of 2021 to control inflation.

“It will be hard for the market to regain much momentum in the near term since consumer confidence remains weak and household budgets remain under pressure from high inflation,” said Robert Gardner, Nationwide’s chief economist. “Housing affordability also remains stretched, where mortgage rates remain well above the lows prevailing at this point last year.”

A separate report on Friday showed the economy held up better in the fourth quarter than previously thought, growing 0.1% instead of stagnating. Living standards also rose for the first time in more than a year.

Nationwide’s figures are more gloomy than some of the more forward-looking reports that have indicated some strength remains in the market. 

What Bloomberg Economics Says …

“The correction in the UK housing market is deepening. The largest annual decline in the nationwide house price index since 2009 highlights the blow from higher mortgage rates and the biggest squeeze on real incomes in a generation. And it’s far from over.”

—Niraj Shah, Bloomberg Economics. Click for the REACT.

Other headwinds for the housing market include the expiration of government incentives — including a discount on stamp duty that lapsed after the pandemic and the conclusion of the Help to Buy program for people looking to get their first home on Friday.

Another perhaps bigger issue is a bulge of people coming to the end of their mortgage deals that will have to refinance at significantly higher prices. The BOE estimates that 2.5 million more UK mortgage borrowers are exposed to higher borrowing costs this year as their fixed-rate deals expire. 

They face on a £250 increase in monthly repayments on average, and around 110,000 will be at risk of default, the BOE says. 

“With house prices still significantly overvalued in today’s higher mortgage rate environment, we suspect that most of the adjustment in prices is yet to come,” said Andrew Wishart, senior property economist at Capital Economics. 

Rightmove has said that asking prices for properties being put on the market are still rising, and surveyors who appraise houses are turning more optimistic. Mortgage approvals counted by the BOE also ticked up in February but remain below last year’s highs.

Economists said the housing price slump probably will run further until the BOE finishes its quickest tightening cycle in three decades.

“Demand will not recover until either mortgage rates or house prices have fallen substantially further,” Gabriella Dickens, an economist at Pantheon Macroeconomics. “The chances of mortgage rates dropping further in the near term, however, are slim, given that we likely are still several months away from the MPC giving a strong signal that Bank Rate has peaked.”

London prices sagged 4.1% from a year ago to average £511,293. Prices fell more rapidly in East Anglia and Scotland. 

It also was the seventh monthly decline, with prices dropping 0.8% in the month of March alone, more than double the pace economists had expected.

“The housing market reached a turning point last year as a result of the financial market turbulence which followed the mini-budget,” Gardner said. “Since then, activity has remained subdued.”

Read more:

  • UK Mortgage Approvals Rise in Sign of Stability Returning
  • Europe’s Leverage-Heavy Real Estate Stocks Are Raising Warnings
  • UK Property Sellers Lift Asking Prices Despite Worry About Slump
  • Britain’s Property Surveyors See Improvement in Housing Market
  • UK Construction Output Rises Unexpectedly to Strongest Since May
  • Halifax Says UK House Prices Are Rising the Most Since June
  • UK House Prices Fall for Second Month as Loan Costs Bite
  • Mortgage Shock Awaits UK Homebuyers After Pandemic Tax Break

(Updates with BI and analysis from seventh paragraph.)

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