UK house prices post sharpest fall since 2012 as high mortgage rates hurt

By Hanna Ziady, CNN

UK house prices last month saw their biggest annual decline since November 2012, in the latest sign of the lasting pain that the ill-fated “mini” budget conceived by former Prime Minister Liz Truss inflicted on Britain’s property market.

The average price of a house fell 1.1% to £257,406 ($310,000) in February compared with a year earlier, lender Nationwide said Wednesday. That took UK house price growth into negative territory for the first time since June 2020, when the housing market was virtually closed as a result of the pandemic.

House prices have now declined for six months in a row and are 3.7% below their August 2022 peak, according to Nationwide’s index based on purchases involving a mortgage.

“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,” Nationwide’s chief economist Robert Gardner said in a statement.

The “subdued” housing market 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,” he added.

The “mini” budget unveiled in September by Truss and then-finance minister Kwasi Kwarteng collapsed UK bond prices, sent borrowing costs soaring and sparked chaos in the mortgage market, as lenders withdrew hundreds of products, and deals fell through.

“The economy has largely moved on from the mini budget, but the hangover for the UK housing market is more prolonged. We’re still seeing the effects of higher mortgage rates in the last three months of last year,” said Tom Bill, head of UK residential research at broker Knight Frank.

More trouble ahead

Surging food and energy costs alongside feeble pay growth have also taken a bite out of household budgets, weighing on consumer confidence and housing market activity.

Data published by the Bank of England Wednesday showed that mortgage approvals fell for the fifth consecutive month in January to their lowest level in more than two years.

“Inflation has continued to outpace wage growth, and mortgage rates remain significantly higher than the lows recorded in 2021,” said Gardner at Nationwide. “Even though consumer sentiment has improved in recent months, it is still languishing at levels prevailing during the depths of the financial crisis.”

According to Bill at Knight Frank, housing market activity since Christmas has been “solid,” but prices still have further to fall. He expects a decline of 5% this year.

“House prices are 20% higher than they were before the pandemic and we expect around half of this to unwind over the next two years as buyers revise down their budgets,” Bill said.

Andrew Wishart, a senior economist at Capital Economics, said a recent rise in swap rates — a gauge of bank funding costs that are used to price mortgages — would prevent mortgage rates from falling further in the near term.

That means the housing market is “closer to the beginning of this price correction than the end,” he said in a note Wednesday. Wishart expects prices to fall by a further 8% this year.

In more evidence of strain in the housing market, Persimmon, one of Britain’s biggest housebuilders, said Wednesday it expected sales to decline more than 40% this year if current trends persisted. The company’s share price fell 10% in London.

Martin Beck, chief economic adviser to the EY ITEM Club, expects average house prices to fall 10% to 15% from the peak last summer. But he added that the economy “should see momentum return from the second half of this year, as inflation falls back quickly, potentially boosting sentiment in the housing market.”

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