UK House Prices Experience Sharpest Annual Decline Since 2009 Amid Rising Interest Rates

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British house prices witnessed their most significant annual dip since July 2009, with a 5.3% decrease in August compared to the previous year, according to a report released on Friday by mortgage lender Nationwide. The housing market slump was primarily attributed to the recent surge in interest rates, resulting in reduced buyer demand.

In August alone, prices tumbled by 0.8%, marking the most substantial monthly decline since March. This follows a 0.3% decrease in July, reflecting a sustained downward trend in the housing market, as revealed by Nationwide’s data.

Nationwide’s Chief Economist, Robert Gardner, commented on the situation, stating, “The softening is not surprising, given the extent of the rise in borrowing costs in recent months, which has resulted in activity in the housing market running well below pre-pandemic levels.”

The Bank of England has implemented 14 interest rate hikes since December 2021, currently resting at 5.25%. Market analysts anticipate another interest rate hike to 5.5% this month. This persistent rise in interest rates has led to a 20% drop in mortgage approvals compared to 2019 levels, with little indication of this trend reversing, according to Gardner.

Nonetheless, Nationwide holds an optimistic view for the housing market, anticipating a “soft landing.” Their projection is grounded in expectations that unemployment will remain below 5% and nominal wage growth will continue to accelerate.

Gardner shared further insights during an interview with the BBC, suggesting that this prediction implies only a marginal additional fall of 1% to 2% in house prices.

In contrast, Andrew Wishart, senior property economist at Capital Economics, holds a more pessimistic outlook. He foresees a further 5% drop in house prices, resulting in a total peak-to-trough decline of 10.5%.

“We think the August data marks the start of a significant further drop in house prices,” Wishart asserted. He supported his stance by referencing the Royal Institution of Chartered Surveyors survey, which indicates the most extensive price declines since 2009.

Prior to their peak in September 2022, British house prices experienced a remarkable surge, surging by over 25% since the onset of the COVID-19 pandemic. This surge was propelled by increased demand for spacious living accommodations, historically low interest rates, and temporary tax incentives.

A Reuters poll of economists and property analysts, released just ahead of Nationwide’s data, revealed that respondents anticipate a 4% decline in house prices for 2023 compared to 2022. This prediction is slightly higher than the 3% forecast from a similar poll conducted in June. The most pessimistic forecast in the poll anticipates a 10% drop in house prices.

The poll further indicated that, in 2024, house prices are expected to remain stable, with a modest increase of just over 3% anticipated in 2025.

As the UK housing market navigates its current challenges, the ongoing impact of rising interest rates and shifting economic factors will continue to shape the trajectory of house prices in the coming months. Investors, homeowners, and prospective buyers will be closely monitoring these developments, as the market adjusts to this period of uncertainty.

Sam Allcock
Sam Allcock
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