Are house prices falling? February 2023 Nationwide House Price Index, what will happen to housing market 2023?

UK house price growth is now at its lowest rate in more than a decade, having tumbled from the record highs seen in 2022, new Nationwide Building Society house price data for February 2023 has shown.

According to the mortgage lender’s latest House Price Index (HPI), the average price of a property fell 1.1% year-on-year to £257,406. But this average price remains well above those recorded in advance of the Covid-19 pandemic.

It comes as the cost of living crisis is continuing to bite into real-terms incomes, with inflation still sitting at 10.1% on the UK Consumer Price Index (CPI) and continuing to grow in sectors like food and drink. Meanwhile, interest rates were hiked for a tenth successive time to 4% by the Bank of England last month, which means mortgages will remain higher for longer.

Although the inflation crisis is set to ease in 2023, wages could struggle to rise as the UK looks likely to enter a recession over the coming months. The International Monetary Fund (IMF) and UK’s central bank expect an economic depression to hit the country this year. House prices typically fall in a recession as employment tends to become less secure, meaning people are less likely to expose themselves to the major financial cost of moving.

So, what has the latest Nationwide HPI shown - and what does the building society think will happen in 2023?

How does the Nationwide HPI work?

The Nationwide HPI is one of several house price indexes published each month, and gives us a snapshot of how the housing market has been performing.

Nationwide is the second biggest mortgage lender in the country. It bases its research on mortgage data from the approval stage following a valuation of a property. It is therefore similar to the Halifax HPI.

It means it provides a more comprehensive picture of the housing market than other HPIs - like Rightmove’s (which focuses on house asking prices) and Zoopla’s (which focuses on towns and cities) - but is slightly less up-to-date.

What does the latest Nationwide HPI show?

According to the latest Nationwide House Price Index (HPI) published on Wednesday (1 March), house price growth has fallen to its weakest level in more than a decade.

The annual rate of house price rises has now dropped into negative territory, with the average UK property now going for 1.1% lower than it would have in February 2022 - the worst rate Nationwide has recorded since November 2012 and the first annual decline since June 2020. The average house price now sits at £257,406.

It comes after the lender recorded a series of monthly falls from September 2022 after seeing a record high of £273,751 last August. These drops became more pronounced after the Liz Truss mini budget at the end of September, with October and November both seeing major declines of 1% and 1.3% respectively.

Despite the latest drop of 0.5% compared to January, when the average price was £258,297, the housing market is still trading well above where it was before the Covid-19 pandemic. This is because of pent-up demand from the three national lockdowns, as well as things like the government’s stamp duty holiday.

But buyers are now struggling to take advantage of falling prices as a result of low confidence and affordability challenges.

“The recent run of weak house price data began with the financial market turbulence in response to the mini budget at the end of September last year. While financial market conditions normalised some time ago, housing market activity has remained subdued,” said Nationwide chief economist Robert Gardner.

“This likely reflects the lingering impact on confidence as well as the cumulative impact of the financial pressures that have been weighing on households for some time. Indeed, inflation has continued to outpace wage growth and mortgage rates remain significantly higher than the lows recorded in 2021. Even though consumer sentiment has improved in recent months, it is still languishing at levels prevailing during the depths of the financial crisis.”

The lender pointed to data analyst GFK’s consumer confidence index, which shows it is currently at its lowest level since its records began in 1975. Its own affordability index shows mortgages are still tracking well above average as a share of take home pay packets, with monthly repayments accounting for 39.4% of typical incomes - the highest ratio since the 2008 financial crisis.

Although the cost of a 10% deposit has come down against the average first time buyer annual paypacket, it is still tracking 56.2% higher - close to the record high rate recorded in the aftermath of the Truss mini budget, Nationwide has revealed.

Will house prices go down in 2023?

According to Robert Gardner, Nationwide’s latest findings will not be the last grim statistics we see in 2023. He predicts recessionary pressures will hit the market even harder over the coming months.

“It will be hard for the market to regain much momentum in the near term since economic headwinds look set to remain relatively strong, with the labour market widely expected to weaken as the economy shrinks in the quarters ahead, while mortgage rates remain well above the lows prevailing in 2021,” Nationwide’s chief economist said.

“Indeed, despite the modest fall in house prices, for a prospective first-time buyer earning the average income looking to buy the typical home, mortgage payments remain well above the long run average as a share of take-home pay. In addition, deposit requirements remain prohibitively high for many and saving for a deposit remains a struggle given the rising cost of living, especially for those in the private rented sector, where rents have been rising strongly.”

But Mr Gardner envisages conditions may “gradually improve” if inflation continues to come down over the coming months. He said “solid” real-terms gains in incomes and continuing falls in house prices should support affordability, particularly if mortgage rates come down.