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First-time Buyer

House prices fall 3.5% year-on-year

Paloma Kubiak
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Paloma Kubiak

House prices have fallen 3.5% in the year to June, but edged up in the month to an average £262,239.

The latest fall comes on top of the annual decrease of 3.4% in the year to May, and is the highest decrease since prices started experiencing a downturn in February, according to Nationwide’s House Price Index.

Prices month-to-month have stayed relatively stable at 0.1%, which compares to -0.1% in May.

The average house price came to £262,239 in June, which is up from £260,736 in May.

Northern Ireland reported an annual price increase of 0.7%, while all other regions reported a decrease.

The largest annual decrease was in East Anglia at -4.7%, followed by London at -4.3% and North West at -4.1%.

Heightened borrowing costs haven’t had negative impact on sentiment

Nationwide’s chief economist Robert Gardner said longer term interest rate rises have “increased sharply” in the last few months as inflation hasn’t moderated as expected.

He added that this had led investors to expect the Bank of England to increase the base rate further and for it to remain higher for longer.

Meanwhile, longer-term borrowing costs were similar to those in the wake of the mini Budget last year but it was “yet to have the same negative impact on sentiment”.

He noted that the number of mortgage applications had not fallen and consumer confidence had continued to improve but they “remain below long run averages”.

‘Significant drag’ on housing market to come

However, Gardner said the “sharp increase” in borrowing costs would “exert a significant drag on housing market activity in the near term”.

He noted that a first-time buyer earning an average wage buying a typical property with a 20% deposit, would see mortgage payments as a share of take-home pay “well above the long-run average”.

Gardner said house prices were high relative to earnings and deposit requirements were still a “significant barrier for those looking to enter the market”.

A 10% deposit on a typical first-time buyer home is equal to around 55% of gross annual income, down from 59% in late 2022.

But a “relatively soft landing” was possible if the economy performs as expected.

Gardner noted that the labour market was expected to remain relatively robust and unemployment would remain below 5%, while income growth would remain solid.

“A combination of healthy rates of income growth and modest price declines should improve affordability over time, especially if mortgage rates moderate,” he said.

Nearly 400,000 borrowers due to refinance each quarter

Around 85% of the outstanding mortgage stock are on fixed rates, with around 400,000 borrowers due to refinance each quarter.

This is around 20% of the fixed rate mortgage stock refinancing at the end of 2023 and close to 40% at the end of 2024.

Gardner said: “For those coming off two-year fixed rate deals, with mortgage rates approaching 6% a new two-year deal is around 425bps higher than their existing rate, which equates to an increase of £385 per month for a typical borrower.

“Those coming off five-year deals face an increase of 350bps on a new five-year fix (assuming a rate of 5.5%), which equates to an increase of c.£315 per month for a typical mortgage borrower.”

He noted that this was a “significant increase” but borrowers were stress tested at interest rates above those prevailing in the market to “ensure they could cope with such an increase”.

“Moreover, incomes have been rising at a solid pace in recent years. Lenders will also work with borrowers to provide assistance wherever possible.

“Therefore, providing the labour market and interest rates perform broadly as expected, we are unlikely to see the waves of forced selling which would probably be required to result in a more disorderly adjustment to the housing market,” Gardner added.