In August, UK house prices saw a significant 5.3% yearly drop, marking the most substantial annual decline since 2009, as reported by Nationwide.
This decline equates to a reduction of £14,600 in the average UK home's value since the peak in August 2022. The slowdown in the housing market's activity has been attributed to higher borrowing costs for potential buyers. Mortgage approvals have also been approximately 20% below the levels seen in 2019.
The Bank of England has raised interest rates 14 times consecutively since December 2021, currently standing at 5.25%, to address rising consumer prices in the UK. Consequently, lenders have increased mortgage rates, adding pressure to prospective homebuyers.
Robert Gardner, Nationwide's chief economist, explained that the rise in borrowing costs was the primary factor contributing to the fall in average house prices. He noted that housing affordability was now significantly more strained, with typical rates nearing 6%, compared to 1.5% in late 2021. He expressed his belief that the housing market's recovery would take time.
According to Moneyfacts, a financial information service, the average two-year fixed mortgage rate recently reached 6.7%, while the average five-year fixed rate stood at 6.19%.
Although the drop in house prices is the most substantial since 2009, it is essential to note that property prices remain considerably higher than they were in August 2021 when the average price was £248,857. Gardner pointed out that there had been a slight shift in the types of properties being purchased, particularly among those requiring mortgages. Detached houses experienced the most significant decline in transactions, while flats, being more affordable, saw a milder drop.
Nationwide reported that mortgage completions in the first half of 2023 were 33% lower than in 2019. The number of first-time buyers decreased by 25% compared to pre-pandemic levels, and buy-to-let purchases declined by 30%. In contrast, cash deals increased by 2%.
For first-time buyers earning the average wage and purchasing a typical first-time buyer property with a 20% deposit, their monthly mortgage payment would now absorb over 40% of their take-home pay.
Gardner suggested that while the housing market's activity might remain subdued in the near term, increases in earnings combined with lower house prices could improve housing affordability over time, especially if mortgage rates moderate once interest rates peak.
Nationwide, one of the UK's largest mortgage lenders, calculates its house price index based on owner-occupier property purchases involving mortgages. It does not include buy-to-let or cash purchases in its figures. The lender compiles its house price data from its monthly mortgage applications.