UK house prices have unexpectedly dropped in August, signalling the start of a worrying trend for the UK housing market. Their headline average home price fell by 0.1% to £271,079 on June. This decline is largely due to prohibitive mortgage costs which have significantly slowed housing activity nationwide.
Elliott Jordan-Doak, a senior economist at Pantheon Macroeconomics, expanded on what these property tax increases could do. These increases are included in Rachel Reeves’s as yet unpublished, pre-election, autumn budget. He stated that such changes could “throw sand in the gears of housing activity,” indicating that fiscal policies might further complicate an already challenging market.
The increase in mortgage rates has particularly impacted first-time buyers. If you purchase a home putting 20% down, plan on your monthly mortgage payment consuming about 35% of your net income. This major cost is sure to affect your bottom line. By the end of August, the average rate for a five-year, fixed-rate mortgage hit 5%. At the same time, the average rate for a two-year fixed mortgage was a little lower at 4.96%. These sky high rates continue to pinch budgets and depress home prices.
That chilling effect comes from the increased borrowing costs, according to Robert Gardner, chief economist at Nationwide. He noted that these factors are creating a challenging environment for buyers, stating, “House prices are still high compared with household incomes, making raising a deposit challenging for prospective buyers, especially given the intense cost of living pressures in recent years.”
Inflation was another major factor that helped to create today’s economic reality. Just in July, inflation jumped to 3.8%. That was more than economists were anticipating and the tenth consecutive month that the index has come in above the central bank’s 2% target. The contributing factors are high food prices and high cost of traveling. As inflation skyrockets around the country, the impact is solved with a different solution—creating a double whammy on household budgets and purchasing power.
The annual rate of house price growth has slowed, dropping from 2.4% in July down to 2.1% in August. This trend reflects the growing concerns within the housing market and the broader economy as consumers grapple with rising costs.
Mark Harris gave us a tour of the current lending environment, zooming in on the mixed messages coming out of today’s markets. He stated, “The mixed picture is down to rising swap rates, which underpin the pricing of fixed-rate mortgages, and lenders not wanting to offer the best rates during the summer months when staff are on holiday and resources are limited.”
The combination of high mortgage costs, rising inflation, and economic uncertainty presents significant challenges for potential homebuyers in the UK. With policymakers focusing on fiscal reforms and lenders managing a rising interest rate environment, the future of the housing market is still unclear.