UK house prices fell for the first time in more than a year in October, as the Liz Truss government’s mini-budget wreaked havoc on the housing market, pushing mortgage rates sharply higher.
The average price of a property was down by 0.9% compared with September, to £268,282, according to Nationwide building society’s latest monthly report, the first snapshot of a tumultuous period. This was the first fall since July 2021 and the largest since June 2020. The annual growth rate slowed sharply from 9.5% to 7.2%.
Robert Gardner, the Nationwide chief economist, said: “The market has undoubtedly been impacted by the turmoil after the mini-budget, which led to a sharp rise in market interest rates. Higher borrowing costs have added to stretched housing affordability at a time when household finances are already under pressure from high inflation.”
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The increase in mortgage rates meant that a first-time buyer (FTB) earning the average wage and looking to buy a typical FTB home with a 20% deposit would experience a rise in their monthly mortgage payment from 34% of take-home pay to 45%, based on an average interest rate of 5.5%. This is similar to the ratio prevailing before the financial crisis, Gardner said.
Mark Harris, the chief executive of the mortgage broker SPF Private Clients, said the easing of the crisis in the financial markets since Truss resigned had started to feed through to the mortgage market.
“Some fixed-rate mortgage pricing has dropped accordingly over the past few days, with Barclays, HSBC and Santander, among others, reducing their rates,” he said.
However, interest rates are expected to rise further as the Bank of England seeks to bring down soaring UK inflation, which is at a 40-year high of 10.1.% The Bank’s monetary policy committee is expected to raise rates by 0.75 percentage points on Thursday, to 3%.
Such a rate hike could result in mortgage holders on variable rate deals paying hundreds of pounds extra a year in repayments, depending on the size of their loan. Myron Jobson, a senior personal finance analyst at the trading platform Interactive Investor, said: “While anyone on a fixed-term deal is currently protected from rate rises, those approaching the end of their deal are in for a nasty shock when it’s time to remortgage.”
Figures from the banking body UK Finance show that 1.8m mortgage deals are due to end next year and will need to be refinanced at a time of rising rates. Interest rates set by the Bank of England are unlikely to rise above 5%, the deputy governor, Ben Broadbent, said, warning of a “pretty material” hit to the economy if they did. Financial markets are now pricing in a peak of 4.5% in UK rates.
Martin Beck, the chief economic adviser to the independent forecaster EY Item Club, said: “October’s fall [in house prices] could likely be a sign of things to come. Although mortgage rates have retreated from the highs seen just after the mini-budget, they’re still elevated compared with early to mid-September.”
He said that, for example, the standard variable rate on a Nationwide mortgage is 5.24%, compared with 3.74% before the mini-budget. “Cost of living pressures remain challenging, and face being exacerbated by tax rises and public spending restraint in November’s autumn statement, and consumer confidence is notably depressed,” he added.
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Nationwide expects the housing market to slow in the coming quarters, in response to high inflation and rising rates.
Some economists have warned that house prices could fall sharply next year. The property firm Jones Lang Lasalle said this week that house price crashes were rare in the UK and forecast a 6% drop in prices in 2023.
Tom Bill, the head of UK residential research at Knight Frank, said: “Demand will come under more pressure next year as a growing number of people come to the end of fixed-rate deals and mortgage offers made earlier this year when rates were lower begin to lapse.
“Government stability will help underpin transactions but we are witnessing a fundamental shift in rates take place after 13 years of ultra-low borrowing costs that will lead to price declines. Low unemployment, tight supply and well capitalised lenders mean we should avoid the kind of double-digit falls seen during the financial crisis.”