In July, UK house prices experienced the sharpest annual drop in 14 years, falling by 3.8%, as reported by Nationwide. This decline marks the largest since July 2009.

Nationwide highlighted that high mortgage interest rates have posed challenges for potential homebuyers, contributing to the drop in prices. In July, mortgage costs reached the highest level in 15 years due to inflation and uncertainty over rates set by the Bank of England.

The average home price in the UK now stands at £260,828, approximately £13,000 below the peak reached in August of the previous year. Although the drop in house prices may be welcomed by first-time buyers, Nationwide noted that housing affordability remains stretched due to the higher mortgage rates.

Robert Gardner, the chief economist at Nationwide, explained that a first-time buyer on an average wage with a 20% deposit would see mortgage payments account for 43% of their take-home pay, based on a 6% mortgage rate. Just a year ago, these homeowners would have been spending just over a third of their take-home wage on mortgage payments.

The housing market has experienced a slowdown as people face difficulties in purchasing properties. In June, completed housing transactions fell to 86,000, down from over 100,000 in the previous year.

The rising mortgage rates follow several interest rate increases by the Bank of England in an attempt to address stubbornly high inflation. Another interest rate rise is expected on Thursday, taking borrowing costs to at least 5.25%.

Mark Harris, the chief executive of mortgage broker SPF Private Clients, cautioned that the anticipated interest rate increase indicates that the impact of rising mortgage costs is not over yet. However, a few lenders, including HSBC, Barclays, and Nationwide, have reduced their fixed-rate mortgage pricing due to better-than-expected inflation news.

Economists at Pantheon Macroeconomics predict that house prices may need to fall by around 8% from their peak to restore demand and supply to a balanced level.