British house prices experienced their largest drop since 2009 over the past year, with a 3.8% decrease in average prices compared to the previous year. Rising interest rates have impacted the housing market, resulting in sluggish activity and mortgage rates surpassing 6%. Affordability has become challenging for first-time buyers, with mortgage payments consuming a significant portion of their take-home pay. Economists expect the Bank of England to increase its Bank Rate further, leading to a potential downturn in the housing market. However, there is hope for improvement in the long term as steady growth in income and a decrease in house prices may enhance housing affordability.
According to mortgage lender Nationwide, British house prices experienced their largest drop since 2009 over the 12 months leading up to July. The housing market was affected by rising interest rates, resulting in a 3.8% decrease in average house prices compared to the previous year’s July figures, following a 3.5% decline in June.
Nationwide reported a 0.2% decrease in house prices compared to the previous month. The survey aligns with other indicators of the housing market, indicating sluggish activity due to increasing interest rates, resulting in mortgage rates surpassing 6% for both home buyers and existing mortgagors seeking to refinance.
Nationwide’s chief economist, Robert Gardner, stated that a typical first-time buyer with a 20% deposit would now see mortgage payments, at current rates, consume 43% of their take-home pay, up from 32% a year ago. According to Gardner, the challenging affordability situation is the reason for the recent sluggishness in the housing market.
Economists polled by Reuters anticipate the Bank of England to increase its Bank Rate to 5.25% from 5.0%, marking the highest borrowing cost since 2008. Despite a surprise increase in mortgage approvals in June, most economists believe the housing market will experience a downturn as the bulk of the BOE’s rate hikes since late 2021 are still impacting the economy.
Although the housing market is expected to continue being quiet in the short term, steady growth in nominal income and a slight decrease in house prices should gradually enhance housing affordability. This improvement is more likely to occur, especially if mortgage rates decrease once the Bank Rate reaches its highest point.
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