UK house prices: are they falling, average house price, why are prices changing - mortgage rates explained

(Photo: Cate Gillon/Getty Images)(Photo: Cate Gillon/Getty Images)
(Photo: Cate Gillon/Getty Images)

House prices fell month on month for the first time in 15 months in October, according to an index.

The 0.9% drop marked the first monthly decline since July 2021 and was the biggest decrease since June 2020. Annual house price growth also slowed sharply to 7.2% in October, from 9.5% in September, Nationwide Building Society said.

So what does it all mean for potential home buyers? Here is everything you need to know.

Why have house prices fallen?

Across the UK, the average house price in October was £268,282 – and the housing market looks set to slow in the months ahead, the society added.

Robert Gardner, Nationwide’s chief economist, said: “October saw a sharp slowdown in annual house price growth, to 7.2% from 9.5% in September. The market has undoubtedly been impacted by the turmoil following the mini-budget, which led to a sharp rise in market interest rates.

Demand for new homes from first-time buyers dropped by a third after former chancellor Kwasi Kwarteng announced his mini-budget, according to measurements from property company Zoopla.

As mortgage rates soared to highs of 6%, it put the biggest squeeze on new buyers since the late 1980s. The company warned that “mortgage rates of 4% to 5% are likely to be the new norm” even after rates have dropped back in recent days.

Will prices continue to fall?

“Higher borrowing costs have added to stretched housing affordability at a time when household finances are already under pressure from high inflation.” Gardner added: “The market looks set to slow in the coming quarters.”

Inflation will remain high for some time yet, with the base rate of inflation likely to rise further as the Bank of England seeks to ensure demand in the economy slows to relieve domestic price pressures. Investors were concerned that the Bank of England would be forced to keep upping its interest base rate if Liz Truss’ Government pushed ahead with its policies.

Since then, the Government has been replaced and most of the policies abandoned, but rates are still set to rise according to market watchers – just not by as much as markets thought some weeks ago.

“The outlook is extremely uncertain, and much will depend on how the broader economy performs, but a relatively soft landing is still possible,” said Gardner.

“Longer term borrowing costs have fallen back in recent weeks and may moderate further if investor sentiment continues to recover. Given the weak growth outlook, labour market conditions are likely to soften, but they are starting from a robust position, with unemployment at near 50-year lows.

Gardner added that running costs for less energy-efficient properties tend to be considerably higher, leaving these households particularly vulnerable to energy price rises.

Jeremy Leaf, a north London estate agent and a former residential chairman of the Royal Institution of Chartered Surveyors (Rics), said: “On the ground, new buyer inquiries almost dried up as uncertainty about the future direction of mortgage repayments added to cost-of-living concerns. Activity has slowly started to resume since as mortgage rates began to stabilise and are now starting to fall.”