The average house price in the UK experienced its largest annual drop in nearly 14 years in May, as indicated by the leading building society Nationwide.

The organization warned that the housing market is likely to encounter further challenges in the near future.

According to Nationwide's data, property values declined by 3.4% on an annual basis in May, marking the most significant decrease since July 2009, when a 6.2% annual fall was recorded.

In May, the average house price decreased by 0.1% compared to the previous month, in contrast to a 0.4% increase observed in April.

Nationwide's index revealed that the average house price in May was £260,736.

Earlier this year, the housing market exhibited signs of recovery following a surge in mortgage rates toward the end of the previous year, triggered by Liz Truss's tax cut proposals that caused turmoil in financial markets.

However, last week's release of stronger-than-expected inflation figures resulted in a fresh increase in bond yields, as investors factored in potential interest rate hikes by the Bank of England. Consequently, several lenders withdrew or raised interest rates on new mortgages.

Robert Gardner, Nationwide's chief economist, commented, "Average prices remain 4% below their peak in August 2022. Although recent data from the Bank of England indicates some recovery in housing market activity, the number of approved mortgages for house purchases in March was still around 20% lower than pre-pandemic levels."

Gardner added, "Headwinds in the housing market are expected to strengthen in the near term. While consumer price inflation slowed in April, the decline was smaller than anticipated. Consequently, investors' expectations for future interest rate increases rose notably in late May, suggesting a peak around 5.5%, well above the approximately 4.5% peak estimated in late March. Furthermore, rates are projected to remain elevated for an extended period."

He also noted, "Despite subdued activity in the short term, healthy rates of nominal income growth combined with slightly lower house prices should gradually enhance housing affordability, especially if mortgage rates moderate once the Bank of England's base rate peaks."

Riz Malik, director of independent mortgage broker R3 Mortgages, acknowledged that the headwinds mentioned by Nationwide have intensified in recent weeks. He cautioned that the current volatility in the mortgage market, triggered by inflation data, could hamper property transactions as rising rates potentially discourage buyers.

Analysts anticipate further declines in house prices, with Capital Economics projecting an 8% decrease, and Pantheon Macroeconomics suggesting a 4% drop.

In response to higher-than-expected inflation and predictions of additional base rate increases, mortgage deals have been withdrawn by various lenders. The number of available mortgage products has declined by 7% within a week.

Coventry Building Society, HSBC, and Accord Mortgages are among the lenders that have either removed specific mortgage products or increased rates. This volatility is a result of concerns regarding future interest rate hikes, leading lenders to reassess their offerings.

Experts emphasize the importance of seeking advice and carefully assessing the situation to find a mortgage that suits individual circumstances, particularly for borrowers looking to refinance, as average fixed deal rates have risen to around 5%, compared to approximately 3% a year ago.