Are house prices falling?

Higher mortgage costs have cooled demand in recent months, so will this trend continue over the long-term?

Most of the country’s leading house price indices are coming to the same conclusion. House prices across the UK are falling.

On Monday, Halifax said the average UK house price stood at just over £285,000 in July, which is nearly £9,000 less than its peak last August. The UK’s largest mortgage lender went on to say that despite this drop house prices have fallen by a smaller margin over the last six months.

Kim Kinnaird, Director of Mortgages at Halifax, said this means the housing market “continues to display a degree of resilience in the face of tough economic headwinds”.

Meanwhile, Nationwide BS, which is the country’s second biggest mortgage lender, said house prices fell 3.5% in the year to July. Much of this is due to affordability constraints which have lowered demand, according to Robert Gardner, Chief Economist at Nationwide BS.

He said there were 86,000 completed housing transactions in June, 10% fewer than pre-pandemic levels.

So will market activity pick up, and if not will property prices continue to decline?

Falling house prices have become an unusual trend in recent years.

According to Nationwide BS, house prices in the UK fell sharply after the financial crisis in 2008 and bottomed out the following year. Since then, the average house has continued to rise in value.  

After sitting at almost £150,000 in the first quarter of 2009, the price of the average home rose to almost £218,000 in the first quarter of 2020.

This was well above the UK’s rate of inflation. According to the Bank of England (BoE), inflation averaged out at 2.1% between 2009 and 2020. This means a £150,000 lump sum in 2009 would need to grow to just under £188,500 in 2020 to retain its purchasing power.

Then in 2020 the pandemic hit, and house prices rose at a faster pace. This was partly due to the measures the Government put in place to support the housing market.

For example, when Stamp Duty tax was temporarily reduced it made housing more affordable for some people. This increased demand and partly led to accelerated rise in house prices.  

Between 2020 and the start of 2022, the average house price added nearly £43,000 to its value. Once again this was more than inflation, which was starting to increase. 

To combat the rising cost of living, the BoE began to raise interest rates at the end of December 2021. Mortgage rates followed suit, with the the average two year fixed rate rising from 2.38% to 5.79% across last year.

Based on a mortgage of £200,000 over a 25 year period, this represented a near £380 increase onto monthly repayments for a typical two year deal.

This added pressure onto many households’ finances, forcing some borrowers to put their home purchase plans on ice.

With fewer buyers and demand on the market, property prices began to drop too.

GRAPH: Despite a brief drop, fixed rates have risen in recent months. July's inflation figures are set to be released on Wednesday. 

While it may be easy to assume that falling house prices will make homeownership more affordable, those looking to take out a mortgage on their home might find the climate challenging.

First-time buyers, for example, could find it easier to put money together for a deposit but might struggle to pass their lender’s affordability tests.

Despite falling during the early months of 2023, fixed mortgage rates have risen recently. These types of mortgages are the most popular forms of borrowing across the country, according to UK Finance, a trade body.

Its research shows over 80% of mortgage-holders are on fixed rate deals.

As of this month, the average two and five year fixed mortgage rate stands at 6.85% and 6.37% respectively.

Based on a repayment mortgage of £200,000 over a 25 year term, this is how the typical monthly repayments compare to previous years.

*Monthly repayments are rounded up or down to the nearest pound.

While falling house prices might bring first-time buyers some joy, it could be a worry for some borrowers who already hold a mortgage.

This is because if house prices fall significantly by the time they need to remortgage, then they could find themselves in a higher loan-to-value (LTV) bracket.

In essence, an LTV ratio looks at how much the mortgage is lending against the value of the property. For example, a mortgage of £200,000 on a property worth £250,000 has an 80% LTV.

This is because the mortgage is covering 80% of the property’s value.

Higher LTVs typically come with more expensive rates because there is a greater chance of a default.

In March, the Office for Budget Responsibility (OBR) predicted house prices would fall by 10% in the final quarter of the year.

The OBR is an organisation which is tasked with providing the Government with independent economic forecasts.

It said continued inflation and rising mortgage rates were the leading indicators behind its forecast.

More recently, Gardner believes house prices could achieve a “soft landing” if economic conditions follow market expectations. He further explained that because most borrowers are on fixed rates, they should be able to withstand rising borrowing costs.   

Kinnaird also believes that broader economic trends will shape the property market. She said Halifax expects house prices will continue to decline into next year.

“Based on our current economic assumptions, we anticipate that being a gradual rather than a precipitous decline. And one that is unlikely to fully reverse the house price growth recorded over recent years,” Kinnaird explained.

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