The Nationwide house price index for May showed that the annual rate of growth also slipped to -3.4%, down from an annual growth rate of -2.7% in April. 

This is also the largest decline in the annual growth rate since July 2009 when there was a -6.2% year-on-year drop.

Robert Gardner, chief economist at Nationwide, said the softening of growth in May reflected flat house prices when taking seasonal effects into account and said prices remained 4% below the August 2022 peak. 

He added: “Headwinds to the housing market look set to strengthen in the near term. While consumer price inflation did slow in April, it was a much smaller decline than most analysts had expected. As a result, investors’ expectations for the future path of bank rate increased noticeably in late May, suggesting it could peak at around 5.5%, well above the 4.5% peak that was priced in around late March. Furthermore, rates are also projected to remain higher for longer.” 

Nationwide now predicts the base rate to remain slightly above 4% in the long term, an update from its previous view that the rate would drop to just above 3%. 

Gardner said if this was maintained, it would put “renewed upward pressure” on mortgage rates which were starting to fall after the mini Budget. 

He added: “Nevertheless, in our view a relatively soft landing remains the most likely outcome since labour market conditions remain solid and household balance sheets appear in relatively good shape. 

“While activity is likely to remain subdued in the near term, healthy rates of nominal income growth, together with modestly lower house prices, should help to improve housing affordability over time, especially if mortgage rates moderate once bank rate peaks.” 

An uncertain market 

After Nationwide recorded an increase in house prices in April, industry experts pointed out that May’s data highlighted the uncertain mood of the market which has been further disrupted by inflation.  

Myron Jobson, senior personal finance analyst, interactive investor, said: “The month-on-month increase in average house prices in April appears to have been a flash in the pan moment, with prices returning to its downward trend in May. This is symptomatic of a hiccupping market that is adjusting to a come down from the blistering pace of house price growth over the past few years.

“If topsy-turvy house prices haven’t made would-be buyers feel nervous about their prospects, recent changes in the mortgage marketplace might have. Concerns about how high interest rates will go to tackle stubborn and sticky inflation has seen the withdrawal of mortgages from the market since last week, as leaders reassess their propositions. Meanwhile, average rates on two- and five-year fixed deals have also risen, which is the last thing would-be buyers who are pinching pennies to buy a property.

“While any fall in prices is good news for house hunters, it might not be enough to meaningfully offset the rising interest rate and its contribution to monthly mortgage payments. The stark reality is owning a home appears to be a distant dream for many, with high mortgage rate rates, high property prices and a higher cost of living, including climbing rents, making buying a home an increasingly difficult prospect.

Sarah Coles, head of personal finance at Hargreaves Lansdown, was more downbeat, though she noted that households and borrowers weren’t in mini Budget territory.

She said: “House prices fell back very slightly in May, but this is a drop in the ocean compared to the flood of bad news that may lie in store if mortgage rates continue rising. The change in May is largely due to the seasonal adjustment – because prices were broadly flat. What matters is what comes next.

“Confidence had been slowly building in the property market this spring, as buyers and sellers convinced themselves that the horrors of inflation could be coming to an end, and that mortgage rates might continue to fall. However, higher core inflation figures raised expectations that interest rates may have to keep rising, which forced hundreds of  mortgage products to be withdrawn from the market, and major lenders to hike rates. It may well have brought confidence crashing down.

“This isn’t going to be a repeat of the horrors we saw in the aftermath of the mini Budget. The market hasn’t been rocked to anything like the same extent. There’s also the chance that it has overreacted, and rate expectations start to fall back. However, we’re likely to see mortgage rates move higher in the immediate future.”