House prices fell at their fastest annual pace for nearly 14 years in May, according to data from Nationwide. The building society revealed that prices in the year to May fell by 3.4%, the biggest fall since July 2009, as the average property price now stands at £260,736.
This comes after nearly 10% of mortgages have been taken off the market due to concerns about increasing interest rates, according to data from Moneyfacts. The figures indicate that approximately 800 residential and buy-to-let deals have been withdrawn, and average rates on two- and five-year fixed deals have also risen. This comes after the Nationwide building society announced that mortgage rates on new fixed deals would increase by up to 0.45 percentage points in response to higher-than-expected inflation figures.
The Office for National Statistics (ONS) revealed that while Britain experienced the sharpest fall in inflation since August, with the annual rate dropping to 8.7% in April, it was not as significant a decline as predicted. This marked a decrease from 10.1% in March, with UK inflation peaking at 11.1% in October. According to ONS data, electricity and gas prices accounted for about 1.4 percentage points of the decrease in the annual inflation rate.
Nationwide stated that it is raising its mortgage rates to ensure their sustainability, as investors now believe the Bank of England will have to increase rates to as high as 5.5% from the current 4.5%, which will impact mortgage rates throughout the UK. The average two-year and five-year fixed-rate mortgage rates have also increased since last week, currently standing at 5.38% and 5.05%, respectively, according to Moneyfacts. Meanwhile, the number of residential mortgages has decreased by 373, going from 5,385 deals to 5,012.
Earlier this month, the Bank of England raised interest rates by 0.25 percentage points, pushing the benchmark rate to 4.5% from 4.25%, marking the twelfth consecutive increase since December 2021. As a result, typical mortgage holders on the standard variable rate have seen their monthly bills increase by £35, according to AJ Bell. The increase will be even higher for the 1.5 million households with fixed mortgage deals set to expire this year. Homeowners with an average 2.58% fixed rate available in 2021 will see their mortgage payments rise by £13,000 per year if they have a £250,000 loan.
David Hannah, Chairman at Cornerstone Group International, discusses the effect of rising rates on the property market and warns that “borrowers must be prepared for rates exceeding 5%.”
He said, “The latest house price data from Nationwide, highlighting that house prices have experienced the biggest fall since July 2009, will be welcome news for homebuyers, and in particular, first-time buyers.
“However, there are still significant obstacles when looking to purchase a home. A rise in mortgage rates due to inflation figures being stronger than expected is unwelcome news for homeowners.
“However, I believe that the housing market has recently shown significant resilience, and I have a positive outlook for the remainder of the year. Prices are starting to stabilize, which will hopefully boost lender confidence.
“Of course, lenders will adjust rates according to interest rates, but if they see inflation moving in the right direction, that will be crucial.
“Buyers now have more available properties to choose from compared to previous years, thanks to an increase in supply. This will result in fewer bidding wars and, hopefully, a more favourable environment for first-time buyers, contributing to a healthier market.
“It appears that lenders are withdrawing deals in anticipation of the upcoming interest rate announcement.
“This will concern borrowers searching for a new deal and could have a significant impact on their available mortgage options. I anticipate that other lenders will follow Nationwide in increasing their mortgage rates, and borrowers must be prepared for rates exceeding 5%.”