UK House Prices Post Sharpest Fall Since 2012 As High Mortgage Rates Hurt

London CNN -

Last month, UK house prices suffered their biggest annual drop since November 2012, the latest sign of the pain former prime minister Liz Truss' ill-fated "mini" budget has inflicted on the UK property market.

The average house price fell 1.1% to £257,406 ($310,000) in February from a year earlier, lender Nationwide said on Wednesday. This pushed UK house price growth into negative territory for the first time since June 2020, when the housing market virtually ground to a halt due to the pandemic.

House prices have fallen for six straight months and are 3.7% below their peak in August 2022, according to the Nationwide Index, which is based on mortgage-related purchases.

"The latest round of weak house price data began with financial market volatility in response to the mini-budget at the end of September last year," Nationwide chief economist Robert Gardner said in a statement.

The "strained" housing market reflects "the continued impact on confidence, as well as the growing impact of financial pressures that have weighed on households for some time."

The "mini" budget presented by Truss and then finance minister Kwasi Kwarteng in September left the UK in shambles. Bond prices soared as lenders withdrew hundreds of products and ceased operations, driving up borrowing costs and wreaking havoc on the mortgage market.

“The economy has largely recovered from the mini-budget, but the UK property market remains tight. "We are still seeing the impact of higher mortgage rates in the last three months of last year," says Tom Bill, head of UK residential property research at brokerage Knight Frank.

Consumer confidence and activity in the housing market weighed on household budgets, along with weak wage growth and higher food and energy costs.

Data released by the Bank of England on Wednesday showed mortgage approvals fell for the fifth straight month in January to their lowest level in more than two years.

"Inflation continues to outpace wage growth and mortgage rates remain well above the all-time lows set for 2021," Nationwide's Gardner said. "While consumer confidence has improved in recent months, it has stalled at levels seen in the depths of the financial crisis."

Property market activity has "hardened" since Christmas, but prices must fall even further according to Knight Frank's bill. It expects a drop of 5% this year.

"House prices are 20% higher than before the pandemic and we expect that to halve over the next two years as buyers tighten their budgets," said Bill.

Capital Economics chief economist Andrew Wishart said the recent rise in the exchange rate, a measure of the cost of funds that banks use to price mortgages, should prevent mortgage rates from falling further in the short term.

That means the housing market is "closer to the beginning of this price correction than the end," he said. Wishart expects prices to fall another 8% this year.

In additional evidence As for the stress on the housing market, Persimmon, one of Britain's biggest housebuilders, said on Wednesday it expects sales to fall by more than 40% this year if current trends continue. The price of the company's shares fell by 10% in London.

Martin Beck, chief economic adviser at EY ITEM Club, expects average house prices to fall 10-15% from last summer's peak. but he added The economy "should see a return to momentum starting in the second half of this year as inflation returns quickly and potentially boosts confidence in the housing market."