House prices fall again as mortgage costs rise

ITV News Business and Economics Editor Joel Hills explains why house prices are falling again while mortgage costs rise

The Nationwide is the UK’s largest building society and one of its largest lenders, accounting for one in eight mortgages that are issued.

The lending it did in May showed house prices fell by 0.1% during the month and were 3.4% lower than in May last year.

The Nationwide’s numbers show the market found its reverse gear last October, but only after a period of rather extraordinary boom.

Indeed, the price of the average property in the UK stands at £260,736, that’s still £40,000 higher than in March 2020 as the UK went into lockdown.

Until last week, estate agents and surveyor were reporting signs of stability. 

The Nationwide predicts a 'relatively soft landing' for interest rates in the months ahead. Credit: The Nationwide

The economy has proved remarkably resilient in the face of rising prices but news, last Wednesday, that inflation is falling more slowly than hoped created a dramatic reassessment of how high interest rates will have to rise to contain it.

Banks and building societies have spent the last week pulling their cheaper mortgage deals. 

The average interest rate paid on a two-year fix - the most popular mortgage - has risen to 5.49% according to Moneyfacts. A year ago it was 3.03%. 

Higher interest rates were already blowing through the housing market like an Autumnal gust. 

The number of new mortgage approvals fell to 48,700 in April to level, that’s around 20% below pre-pandemic levels.

The number of mortgage approvals dropped steeply as interest rates rose. Credit: Bank of England

In the same month, the Bank of England says net mortgage lending fell by £1.4 billion as households repaid more than they borrowed. 

“Sales are falling even faster than valuations,” says James Sproule, UK Chief Economist at Handelsbanken, who thinks we’ve reached “the half way point of the overall decline in house prices”.

Most economists think the market has further to fall, the only disagreement is over the size of the drop.

Mortgage affordability is being severely stretched but history tells us that what happens next will depend to a large extent on what happens to unemployment. 

People tend to lose their homes when they lose their jobs and when people lose their jobs banks tend to get more jittery about lending.

Unemployment is historically low and expected to remain so in the months ahead. 

The Nationwide’s prediction: “a relatively soft-landing remains the most likely outcome.”

But then no lender has ever forecast a crash. 

Want a quick and expert briefing on the biggest news stories? Listen to our latest podcasts to find out What You Need To Know...