Market News

(Bloomberg) -- UK house prices resumed their decline, with Nationwide Building Society warning that headwinds for property sellers are increasing.

The mortgage lender’s measure showed prices fell 0.1% in May after a 0.4% gain the month before, a figure that was revised lower from the previous estimate. The annual pace of declines reached 3.4%, the sharpest since 2009.

Borrowers are facing a sharp jump in mortgage costs after inflation remained higher than expected, prompting investors to bet the Bank of England will keep raising interest rates through this summer. The credit rating agency Moody’s predicted the UK would tip into a “mild recession” because of rising rates, and separate figures from the BOE showed consumers taking on fewer loans.

“Headwinds to the housing market look set to strengthen in the near term,” Robert Gardner, chief economist at Nationwide, said in a statement Thursday. “Rates are also projected to remain higher for longer. If maintained, this is likely to exert renewed upward pressure on mortgage rates, which had been trending down.”

He projected a “relatively soft landing” for prices because unemployment remains low and households have built up a financial cushion to weather the shock.

The annual pace of declines accelerated to 3.4% from 2.7%, putting the average value of a home at £260,736 ($324,130) or about 4% below its peak in August last year.

Separate figures from the Bank of England showed mortgage approvals fell and consumers repaid debts at a historic pace, reflecing a jump in interest rates. Lenders authorized 48,700 home loans in April, down sharply from the 51,500 approved in March. 

The effective rate on new mortgages rose 5 basis points to 4.46% in April, closing in on the threshold of 5% the BOE has identified as painful to consumers. The BOE figures showed households repaid £1.4 billion of mortgage debt in April, the weakest month on record excluding the pandemic.

What Bloomberg Economics Says ...

“Britain’s housing market is set for a further correction. While the UK Nationwide house price index declined by less than expected in May, lenders have started to pull cheaper mortgage deals off the market in anticipation of higher borrowing costs. That means a more significant adjustment in house prices is likely to resume.”

—Niraj Shah, Bloomberg Economics. Click for the REACT.

Despite the slip in national prices, estate agents said demand in London — where property is most expensive — remained high. 

“May saw a lot of activity in Central London with international buyers, in particular high net worths from the Middle East, coming to the capital in big numbers to take advantage of the recent softening of the market and invest here securely for the long term,” said Oliver Fish, director of London-based luxury estate agency Oliver James. 

Landlords, meanwhile, were being forced to sell some of their property portfolio as mortgage costs rise. But Fish expected confidence to creep back to the market during the course of the year “as we adapt to an even more expensive rate environment.”

Despite the quickest series of rate rises in four decades, the impact of rising borrowing costs is just starting to hit the housing market. The BOE estimates that only a third of its rate hikes since December 2021, which have pushed the base rate up from 0.1% to 4.5%, have currently fed through into the economy.

Borrowers feel the impact when they go to refinance fixed-rate deals, with the BOE estimating 1.3 million face that pain between April and December this year.

For several months, Nationwide’s measure of house prices has shown sharper declines than rival lender Halifax. Even so, Halifax’s index fell for the first time this year last month, underlining the downward pressures hitting the market. 

Despite the decline, house prices have not fallen by the 10% which many economists warned of this year. While tighter financial conditions have subdued buying activity, a lack of supply and a robust labor market have meant the market is holding up better than expected. 

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(Updates with BOE mortgage figures. An earlier version corrected the direction of the revision in the previous month.)