UK House Prices Continue to Fall

The UK housing market is facing a prolonged slowdown as high interest rates, rising inflation and economic uncertainty deter potential buyers and force sellers to lower their asking prices.

According to the latest data from Nationwide, the UK’s largest building society, the average house price fell by 5.3% in the year to August 2023, the most substantial annual drop in house prices since the aftermath of the financial crisis in 2009. The average house price in August was £260,828, down from £275,621 a year ago.

The decline was widespread across the country, with the South West and London experiencing the largest falls of 7.2% and 6.8%, respectively. The only region that saw a slight increase in house prices was Northern Ireland, where prices rose by 0.4% over the year.

The housing market, which remained buoyant during the Covid-19 pandemic thanks to government support schemes and a temporary stamp duty holiday, has begun to lose momentum since the start of 2023. The Bank of England has raised its base rate five times since November 2022, from 0.1% to 2%, in an attempt to curb inflation and cool down the economy. This has pushed up the cost of borrowing for homeowners and reduced the affordability of mortgages for new buyers.

The higher interest rates have also dampened consumer confidence and spending power, as inflation has soared to 4.9% in July, well above the Bank’s 2% target. The rising cost of living has been driven by supply chain disruptions, labour shortages and higher energy prices, which have affected many sectors of the economy.

The uncertainty over the UK’s future relationship with the European Union has also weighed on the housing market, as negotiations over a trade deal have stalled and tensions have risen over the implementation of the Northern Ireland protocol.

Robert Gardner, Nationwide’s chief economist, said that the outlook for the housing market remains challenging in the near term. He said that house prices are likely to continue to fall in the coming months, as demand weakens and supply increases. He added that the pace and extent of the decline will depend on how quickly interest rates and inflation stabilise, and how the UK-EU relationship evolves.

However, Gardner also noted that there are some positive factors that could support the housing market in the longer run. He said that the UK economy is expected to recover from the pandemic-induced recession, as vaccination rates remain high and Covid-19 restrictions ease. He also said that the underlying demand for housing remains strong, as household formation continues to outstrip supply, and people’s preferences for more space and home working persist.

Some analysts have also suggested that the current downturn in house prices could be a temporary correction rather than a crash. They argue that house prices had become overvalued during the pandemic boom, and that a moderate adjustment is necessary to restore affordability and balance in the market. They also point out that house prices are still higher than they were two years ago, before the pandemic hit.

The Office for Budget Responsibility, which advises the government on the health of the economy, has predicted that house prices will drop by 10% over the next two years. That would be about half the fall of the financial crisis of 2008 and would put prices back to autumn 2021 levels. But it also warned that predictions are very uncertain, and that further sharp rises in interest rates could trigger even steeper falls in house prices.

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