UK house prices experienced their first monthly decline of the year in May, according to Nationwide, as rising interest rates fueled by the war in Iran dampened homebuyer demand. The average house price fell by 0.6% compared to April, landing at £278,024. While prices were still 1.7% higher than the same month last year, this marks a significant slowdown from the 3% annual growth recorded in April.
Impact of Rising Interest Rates
Robert Gardner, chief economist at Nationwide, noted that the loss of momentum was expected given the uncertainty stemming from the Middle East conflict and subsequent increases in energy prices and market interest rates. Mortgage rates have broadly risen across the market in recent months. Data from Moneyfacts shows that the average two-year fixed rate stood at 5.68% at the end of May, while the average five-year fixed rate was 5.63%.
Tom Bill, a researcher at estate agent Knight Frank, observed that the housing market is slowing down at a time when it would typically gain momentum. He stated that while there will not be a sudden crash, higher borrowing costs will gradually erode spending power and squeeze house prices as pre-conflict mortgage rates expire.
Forecasts and Outlook
Estate agent Savills has revised its forecast, predicting a 2% decline in house prices this year due to rising mortgage rates. The firm noted that the war in the Middle East has fundamentally changed its outlook for the UK property market, contrasting with its previous expectation of a 2% rise.
However, Gardner added that the impact on affordability has been modest so far. Swap rates, which underpin fixed-rate mortgage pricing, remain well below the highs of 2023 and are broadly in line with 2024 levels. If the current shock passes quickly and energy prices normalize, any near-term softening in the housing market may prove short-lived.
Martin Beck, chief economist at WPI Strategy, cautioned that even if mortgage rates edge lower, the market remains vulnerable. He highlighted that affordability is still stretched, with mortgage repayments absorbing a historically large share of household incomes. A weakening labor market could pose a greater threat to house prices than interest rates alone.
Last week, Bank of England Governor Andrew Bailey indicated that the central bank is in no rush to raise interest rates while the outcome of the Iran war remains uncertain and UK economic growth stays weak. The Monetary Policy Committee last voted in April to keep the key interest rate unchanged at 3.75%.
