UK house prices fell last month at the fastest annual rate in 14 years, as higher interest rates adversely affected people’s ability to purchase property with a mortgage.

According to Nationwide building society, residential property prices fell by an average of 3.8% year-on-year, the sharpest drop since July 2009 when the global economy was in the grips of financial crisis. It compared with a fall in annual prices of 3.5% in June.

The average price of a typical home now stands at £260,828, 4.5% below the peak reached in August last year.

The latest data also reveals that property prices dipped by an average of 0.2% in July compared with previous month.

The Bank of England, which has raised interest rates 13 successive times since December 2021 in an attempt to curb soaring inflation, is expected to raise the case rate again on Thursday, from 5% to 5.25%, which could yet lead to another rise in mortgage costs, making the prospect of acquiring property even more unaffordable for many people.

Nationwide’s chief economist, Robert Gardner, said a first-time buyer on an average wage, who had saved a 20% deposit, would see mortgage payments account for 43% of their take-home pay, up from just over a third a year ago. That is based on a mortgage at a 6% rate.

The latest data released yesterday showed mortgage rates continue to edge higher. A typical two-year fixed mortgage rate is now 6.85%, up from 6.81% the previous day, according to financial information service Moneyfacts.

A five-year fixed rate mortgage is 6.37%.

Gardner said: “Investors’ views about the likely path of UK interest rates have been volatile in recent months. There has been a slight tempering of expectations in recent weeks but longer-term interest rates, which underpin mortgage pricing, remain elevated.”

Industry reactions:

Tom Bill, head of UK residential research at Knight Frank, said: “Higher borrowing costs have knocked sentiment and forced buyers to recalculate their budgets but the property market hasn’t slammed on the brakes.

“The bank rate is nearing its peak, which means that while sentiment will remain subdued, it will only improve in the second half of this year. That said, prices and sales volumes will come under pressure as the market descends from the highs of the pandemic and adjusts to the new lending environment.

“While we expect UK prices to fall by 5% this year, demand should prove more resilient than expected between now and the general election given the cushioning effect of wage growth, high levels of housing equity, lockdown savings, the availability of longer mortgage terms, forbearance from lenders and the popularity of fixed-rate deals in recent years.”

Iain McKenzie, CEO of The Guild of Property Professionals, commented: “Another modest fall in house prices in July reflects what we are seeing on the ground. There may be greater willingness to negotiate when it comes to the asking price but the market is still robust.

“Estate agents across the UK aren’t seeing the dramatic shifts in price that they were during the pandemic, with properties holding their value relatively well considering the economic challenges that have faced the country this year.

“Affordability is the biggest barrier to homeownership, as inflation and cost of living pressures are still gripping households. Without the certainty of knowing that they can pay back monthly mortgage repayments, potential buyers may be hesitant to part with their deposit.

“Despite high rates and affordability pressures, mortgage approvals are returning back to healthy levels. High rental prices across the country mean that now is still a good time to buy, if you are able to secure a mortgage.

“The latest inflation figures show some light at the end of the tunnel, and there is still a good chance that the year will be softer on the industry than was previously forecast.”

John Ennis, CEO of Chestertons, said: “Whilst there were fewer first-time-buyers with support from the Bank of Mum and Dad, we witnessed an increase in cash buyers and higher-valued property sales in excess of £1m. This was further driven by continuously strong demand for larger family homes in London’s leafier suburbs such as Richmond as well as luxury townhouses in areas such as Islington and Kensington.

“Some buyers who are currently registering are optimistic that we will be seeing more favourable interest rates at some point. Their desire to continue the house hunt has therefore remained strong with many hoping to find a property by the autumn.”

Nathan Emerson, CEO of Propertymark, commented: “Our member agents report the number of valuations for sale conducted per branch remaining steady and a return to normal pace in the market is evident despite ongoing economic turbulence.

“With a core portion of the country still looking to move home, this is putting buyers in the driver’s seat who are now able to negotiate and secure a property at a reasonable price, playing a part in combatting rises in mortgage rates.”

Nicky Stevenson, MD at Fine & Country, said: “Affordability pressures are weakening house price growth, but demand remains undimmed, especially for properties that are sensibly priced.

“Mortgage approvals in June reached their highest level since October 2022, a month impacted by soaring interest rates after the mini-Budget.

“Since then, borrowers have got used to the higher interest rate environment. A potential slowdown in Bank of England rate hikes as inflation falls will restore even more confidence.

“The key for sellers is to price their property right from the outset — those that do are still seeing strong interest from buyers and are selling much more quickly.

“Buyers are also looking at properties where there is potential scope for negotiation, and the prospect of securing a good price on their next home is still encouraging them to the market.”

Simon Gerrard, MD of Martyn Gerrard, commented: “Repeated interest rate hikes will have a played a pretty big role in today’s figures. We certainly haven’t seen demand disappear, but we have seen buyers become increasingly apprehensive about whether they can afford ever-increasing mortgage costs in light of repeated rate hikes.

“If interest and mortgage rates have reached or are reaching their peak, we could see activity pick back up in the months ahead. I believe we are nearing the peak, although there is talk that we may see interest rates increased a final time by a quarter of a percent later this week. If indeed this is the final rate increase, then confidence will return, and buyers will be able adjust to the market conditions.

“As soon as we see downward pressure on interest rates, the pent-up demand in the market will be released, and we will see momentum pick up again. There is light at the end of the tunnel, but it’s up to the Bank of England how quickly we get there.

“If certain headlines are to be believed, the big news is that the government appears to have finally recognised the need to build more houses in urban areas, where they are desperately needed, and it will be relaxing planning laws. However, I would caution to keep enthusiasm on ice, as we’ve heard these soundbites without action all this before.

“It’s inevitable that this latest reaction, dressed as policy, is doomed to fail. After all, the previous attempt to provide a Permitted Development right for adding extra floors to blocks of flats was hamstrung by a ruling in the High Court that has given local authorities apparent carte blanche to block permitted development, purely on a subjective view of how the building would look in the street scene, even if all the extensive criteria are met. It’s time that the government woke up and addressed this issue, which it has repeatedly kicked down the road.

“Rather than fiddling round the edges, what we desperately need is for the government to show strong leadership and fix our archaic planning system that is inherently anti-development.

James Forrester, MD of Barrows and Forrester, commented: “A gloomy market outlook on the face of it, but rather than entering a deep freeze, it’s fair to say the market is thawing. Yes, affordability remains an issue, however, just this week we’ve seen a big spike in mortgage market activity, which suggests that an uplift in house prices is just around the corner.

“As interest rates begin to reduce, this growing market momentum will start to snowball and this will reverse the downward house price trends of recent months.”

Jason Tebb, CEO of OnTheMarket, said: “Annual house price growth, while continuing to decline in July, remains broadly stable.

“Consecutive interest rate rises, with the potential for another to come this week, combined with the high cost of living mean borrowers are less able to pay inflated prices to secure a property, even if they may have been prepared to in the past.

“As we reach the mid-point of summer, the market is bound to be quieter as many are away on holiday. However, there are still focused buyers keen to move with sellers that price carefully and who are prepared to be flexible to achieve a timely sale.”

Chris Hodgkinson, MD of House Buyer Bureau, commented: “The weakest level of annual house price growth since July 2009 is sure to cause alarm for the nation’s home sellers and many will be keen to sell their home quickly before the rot sets in any further.

“The good news is that we’re not in the midst of a market crash, albeit we are seeing a downward correction. However, the real challenge at present is the heightened level of market instability, the ability to actually find a buyer in a proceedable position and, once you have, making it through to completion without the transaction falling through.”

Marc von Grundherr, director of Benham and Reeves, added: “We’ve seen inflation ease in recent weeks, however, interest rates and the resulting cost of borrowing remain high and this is continuing to dampen buyer appetites, which in turn is impacting house prices.

“While we don’t anticipate any notable correction on the horizon, we expect these lethargic market conditions to remain in the short-term, until such time the cost of climbing the ladder starts to reduce.”