UK’s House Prices are Slumping as Mortgage Rates Soar

House prices in the United Kingdom plummeted at their fastest annual rate in 12 years in June, as mortgage costs continued to rise, putting more strain on the property market.

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Property prices fell 2.6% year on year in June, the most since June 2011 and a significant increase from the 1.1% annual dip reported in May, according to mortgage lender Halifax’s latest price index released Friday.

Prices fell for the third month in a row, down 0.1% since May. The average house in the United Kingdom presently costs £285,932 (£364,490), down from a high of £293,992 in August 2022.

The annual reduction hides a tiny recovery in prices this year, according to Kim Kinnaird, director of Halifax Mortgages, following the devastating impact from the United Kingdom’s “mini budget” in October, which saw mortgage rates soar and home prices collapse.

“Average house prices are actually up by +1.5% (£4,000) so far this year, with most of that growth coming in the first quarter, following the sharp fall in prices we saw at the end of last year,” she said.

However, she added that “the housing market remains sensitive to volatility in borrowing costs.”

House prices have ‘further to fall’

Rising borrowing costs have plagued homeowners and would-be buyers over the last year as the Bank of England struggled to control stubbornly high inflation.

In June, the Bank of England hiked interest rates for the 13th time in a row, raising the base rate by a surprise 50 basis points to 5%. It happened as core inflation in the United Kingdom increased month on month in May.

Inflationary pressures and higher benchmark bank rates have driven up UK sovereign gilt yields, which are used to price mortgages, causing some lenders to raise rates or discontinue certain programs entirely.

The summer is likely to see price cuts become even more widespread, and we may well see house prices fall more significantly. Sarah Coles -HEAD OF PERSONAL FINANCE AT HARGREAVES LANSDOWNE

Sarah Coles, head of personal finance at Hargreaves Lansdowne, said the latest rate hike was not fully reflected in Friday’s housing data, likely spelling more pain ahead for borrowers.

“Two-year fixed rates started June just under 5.5% and five-year deals at 5.1%, according to Moneyfacts, and they ended the month at 6.4% and just shy of 6% respectively. All eyes will be on just how much damage may be done when new rates feed through into the figures,” Coles told CNBC.

Higher mortgage rates look set to add further downward pressure to the housing market, she added, with prices on track to fall further this summer.

“Sellers have already started cutting prices to shift their properties. Zoopla figures showed one in 20 made a cut in May, averaging 9%. The summer is likely to see price cuts become even more widespread, and we may well see house prices fall more significantly,” she added.

Liam Bailey, Knight Frank’s head of worldwide research, agreed, stating that the domestic housing market has “further to fall in terms of pricing.” According to the real estate company’s latest global housing index, which was released on Wednesday, house prices in the United Kingdom declined 3.1% year on year in the first quarter.

“While lower prices will be welcomed by first time buyers, higher rates mean affordability will still be stretched for most new market entrants,” he said.

Mortgage rates continue to rise

The Bank of England is expected to continue its tenacious attempts to contain inflation with additional rate hikes during the rest of the year.

Rates are now expected to peak at 5.75% to 6% in November, however JPMorgan indicated Thursday that they may reach 7% “under some scenarios.”

“Markets have continued to ramp up bets in favour of higher Bank of England interest rates in the past few days,” said Matthew Ryan, head of market strategy at global financial services business Ebury, via email. “Swap rates now see a terminal BoE base rate of 6.5% by mid-2024 — a total of 150 additional basis points of hikes.”

This means that mortgage rates are likely to increase further before falling, aggravating homeowners’ agony and intensifying the UK’s deteriorating rental issue as buy-to-let landlords pass on higher mortgage repayments to tenants or depart the market entirely.

“With markets now forecasting a peak in Bank Rate of over 6%, the likelihood is that mortgage rates will remain higher for longer, and the squeeze on household finances will continue to put downward pressure on house prices over the coming year,” Halifax’s Kinnaird said.

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