UK House Prices Slide at Sharpest Annual Pace Since 2012

(Bloomberg) — UK house prices fell at their sharpest annual pace since 2012 last month, steepening a downturn sparked by a jump in mortgage rates.

The average cost of a home fell 1.1% from a year ago last month after a gain of the same size in January, Nationwide Building Society said Wednesday. It marked the sixth consecutive monthly drop in prices and the first annual decline since June 2020.

“It will be hard for the market to regain much momentum,” Robert Gardner, Nationwide’s chief economist, said in a statement Wednesday. “Headwinds look set to remain relatively strong, with the labor market widely expected to weaken as the economy shrinks in the quarters ahead, while mortgage rates remain well above the lows prevailing in 2021.”

The report points to a tightening squeeze on consumer spending power after inflation jumped to its highest in 41 years, prompting an unprecedented series of interest rate hikes from the Bank of England. That pushed up the cost of borrowing to levels not seen since the global financial crisis more than a decade ago.

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What Bloomberg Economics Says …

“The largest annual decline in the Nationwide house price index since 2012 highlights how higher mortgage rates and the biggest squeeze on real incomes in a generation is hitting the housing market hard. We remain of our long-held view that UK home values will drop by around 10% in 2023, from the September 2022 peak.”

—Niraj Shah, Bloomberg Economics. Click for the REACT.

A separate report from the British Retail Consortium showed prices in UK stores rose at their strongest pace since at least 2005, forcing consumers to pay more for a smaller basket of goods. 

“Retail prices across the board continued to react to the impact of soaring energy bills, higher running costs and tougher trading conditions brought about by the war in Ukraine,” said Helen Dickinson, chief executive officer at the BRC. “Prices will remain high over the coming months.”

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Read more: Inflation in UK Shops Hits Record High With Little Relief Ahead

After soaring through the pandemic when the BOE’s key rate was near zero, house prices started sliding late last year and now have clocked up their longest run of monthly declines since 2008 to 2009.

Despite the fall in house prices, homes are still becoming more unaffordable for first-time buyers due to higher mortgage rates and shrinking real wages. The average value of a home was £257,406 ($310,380), 3.7% lower than the August 2022 peak.

Nationwide said mortgage payments on average consumed 39.4% of take-home pay, the most since the financial crisis and well above the long-run average of 29.4%

“For a prospective first-time buyer earning the average income looking to buy the typical home, mortgage payments remain well above the long run average as a share of take-home pay,” Gardner said. Deposit requirements were also “prohibitively high” for many.

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Nationwide’s report agrees with other surveys pointing to a weakening in the market. Homebuyers are getting the edge in the UK property market as sellers cut their asking prices to get deals done.

The average discount to asking price to achieve a sale was 4.5% this month, according to a report from property portal Zoopla. That’s the most in more than five years and up from 0.4% in 2022 and 0.6% the year before.

But Nationwide diverged from data published by property portal Rightmove last month, which suggested asking prices were unchanged. This could suggest a growing divide between what sellers want, and what buyers are willing to pay.

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—With assistance from Damian Shepherd, Andrew Atkinson and Katie Linsell.

(Updates with average home costs and Rightmove data below the second chart.)