Are UK house prices falling? May 2023 Nationwide House Price Index, average house sale prices explained

Mortgage rates look set to soar after worse-than-expected CPI inflation data suggested the Bank of England is likely to hike interest rates again in June

UK house prices could be set to drop over the coming months after the latest set of inflation data, Nationwide Building Society has warned.

The mortgage lender said it envisages stronger “headwinds” as a result of the worse-than-expected UK inflation figures released by the Office for National Statistics (ONS) in late May. The rate fell from 10.1% to 8.7% between March and April 2023, with the Bank of England having expected it to fall closer to 8%.

It has led markets to price in further interest rate hikes beyond the 4.5% rate the UK central bank set in mid-May. The news has also created chaos in the mortgage market, where products have been withdrawn as lenders assess where prices are headed.

Nationwide has itself been forced to hike mortgage rates in response to the upheaval. It comes after Zoopla said house prices could fall as a result of pricier borrowing costs. Up until the latest round of house price data the market had appeared to be stabilising, according to the leading house price indices covered by NationalWorld.

So, what has the latest Nationwide HPI shown - and where does the building society expect will happen next?

What does the latest Nationwide HPI show?

In its House Price Index (HPI) for May, which it published on Thursday (1 June), Nationwide found property prices remained broadly flat month-on-month.

The average house price it recorded of £260,736 was £300 above the previous month’s figure - although, on a seasonally adjusted basis (i.e. taking out seasonal variations, such as the typical spike in house buying we see each spring), this marked a 0.1% monthly decline. It also saw the annual price inflation rate slip further behind that recorded in April, with prices 3.4% down against the year.

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Average prices are now 4% (£13,000) below their peak of £273,751, which was recorded in August 2022, but 1.4% (£3,600) above the low of £257,122 seen in March. This trough came after consecutive monthly declines in the wake of the Liz Truss Mini Budget.

Nationwide said it expects the property market to “remain subdued” going forward, with some form of reversal in prices expected as a result of recent inflation data. The latest measurements for the rate of price rises in the UK economy did not decrease by as much as had been anticipated by the Bank of England, raising the prospect of further jumps in interest rates.

The Building Society’s chief economist, Robert Gardner, said: “Headwinds to the housing market look set to strengthen in the near term. While consumer price inflation did slow in April, it was a much smaller decline than most analysts had expected. As a result, investors’ expectations for the future path of bank rate increased noticeably in late May, suggesting it could peak at 5.5%, well above the 4.5% peak that was priced in around late March. Furthermore, rates are also projected to remain higher for longer.”

Mr Gardner added that this change in sentiment is likely to “exert renewed upward pressure on mortgage rates” following months of gradual declines in repayment costs. But he said he expected to see a “relatively soft landing” given the jobs market remains strong. “While activity is likely to remain subdued in the near term, healthy rates of nominal income growth, together with modestly lower house prices, should help to improve housing affordability over time, especially if mortgage rates moderate once bank rate peaks.”

Bank of England data shows mortgage approvals drop

The latest Nationwide HPI came as the Bank of England revealed the number of mortgage approvals fell 5% (2,800) to 48,700 between March and April. These figures coincided with a 0.05% increase in the effective interest rates paid by households to 4.46%.

This data measures a period before the turmoil seen in the mortgage market in recent days, suggesting the figures are likely to get worse going forward and could reduce housing market activity. According to Myron Jobson, senior personal finance analyst at investment platform Interactive Investor, the statistics pointed to greater caution among would-be buyers.

Bank of England interest rate setters, including governor Andrew Bailey (centre) will be looking at the core inflation rate closely (image: AFP/Getty Images)Bank of England interest rate setters, including governor Andrew Bailey (centre) will be looking at the core inflation rate closely (image: AFP/Getty Images)
Bank of England interest rate setters, including governor Andrew Bailey (centre) will be looking at the core inflation rate closely (image: AFP/Getty Images)

“Excluding the period since the onset of the Covid-19 pandemic, mortgage borrowing has plunged to the lowest level since records began as high mortgage rates, in tandem with high house prices and a higher cost of living, has made ownership uneconomical for many would-be buyers,” he said. “Many homeowners and those reaching for the first rung of the property ladder are struggling to get their heads around the recent uptick in mortgage rates, which has added hundreds of pounds to monthly repayments at a time when inflation is still running hot. Just as the hangover effect from the instability in the mortgage market in the wake of the mini-budget market chaos last year, was starting to dissipate, rates ticked up again in April - adding to affordability woes.

“The mortgage pain is far from over as concerns over how higher interest rates will go has resulted in the withdrawal of 7% of mortgages from the market since last week, and an increase in average rates on two- and five-year fixed deals. The cost of homes remains unacceptably high for many would-be buyers, who are consigned to the sidelines until they can make the numbers work.”

Laura Suter, head of personal finance at investment platform AJ Bell said the Bank of England figures were a sign of “jitters” among homeowners. “For many homeowners it’s just not an option to borrow more money and move to the next house on the ladder with interest rates where they are. And others are too nervous about the direction of rates and the housing market to make that next house move – so staying put seems the safest option.”