House Prices Fall Amid Looming Interest Rate Hikes

In May, house prices experienced a year-on-year decline for the first time since 2012, as potential buyers faced the impact of increased mortgage rates.

According to mortgage lender Halifax, property prices decreased by 1% compared to May 2022, marking the first annual fall in 11 years. Monthly prices remained stable in May, following a 0.4% decrease in April, resulting in an average home value of £286,532. These figures are backed by the Royal Institution of Chartered Surveyors (RICS), who have warned that the house prices in the UK are still on a downward trend, with the looming prospect of interest rate hikes taking their toll on the market.

Although there was a slight improvement in sales last month, RICS warned that further interest rate increases from the Bank of England (BoE) could hinder the sector's recovery. RICS' UK residential market survey revealed that new buyer enquiries and agreed sales showed the least negative readings in 12 months. On average, agents had 38 properties available, slightly below the long-term average of 40.

The net headline balance for new buyer enquiries in May was -18%, indicating subdued demand. However, this figure represents an improvement from April's net balance of -34%, marking the least negative reading in a year. Similarly, the agreed sales indicator returned a net balance of -7%, a noticeable improvement from the figures of -29% and -18% recorded in March and April respectively. New instructions also increased for the first time since early 2022.

While respondents in Scotland and Northern Ireland reported an uplift in house prices, most English regions continued to experience falling prices. The East Midlands (-68%) and the South East (-48%) recorded the deepest negative net balances. RICS senior economist Tarrant Parsons highlighted concerns about the impact of high inflation on the market, which could prompt the Bank of England to raise interest rates. This would lead to higher mortgage rates, reducing affordability and buyer demand.

While rents are on the rise, RICS warns that “stubborn” inflation and expectations of further rate rises will dampen positive trends.

“The latest survey indicates a modest recovery in the sales market activity during May, with generally less negativity compared to the end of 2022,” noted Parsons. “However, it seems storm clouds are gathered, with the UK’s stubbornly high inflation likely undermining the recent improvement in activity by prompting the Bank of England to take further action through interest rate rises, leading to higher mortgage rates and ultimately reducing affordability and buyer demand. The banking sector appears to expect this with many banks and building societies already introducing products with higher interest rates.”

In the rental sector, RICS pointed out that demand continued to outstrip supply, with further pressures arising from interest rate hikes and proposed changes in the Renters (Reform) Bill introduced by the UK Government. These factors are encouraging landlords to sell their properties, exacerbating the availability issue. With rents rising rapidly, the surveyors predict average increases of 6% in the coming years.

The Bank of England's revelation of higher-than-expected inflation has fuelled expectations of interest rate hikes, which have translated into higher fixed-rate mortgages. The average 2-year fixed mortgage rate has risen to around 5.75% from approximately 5.3% before the inflation figures were announced.

This environment may lead potential buyers to wait and assess the impact of rising rates and prices before entering the market. Experts have warned that these factors could seriously affect the market throughout the rest of 2023, as rates are expected to remain elevated for months to come.

Disclaimer: The views expressed above are based on industry reports and related news stories and are for informational purposes only . SSIL does not guarantee the accuracy, legality, completeness, reliability of the information and or for that of subsequent links and shall not be held responsible for any action taken based on the published information.