Twin housing pain: rising costs and falling prices

Higher interest rates are biting into house prices which have fallen for the fourth consecutive month in July although predictions of a more dramatic drop have yet to materialise.

New data from Halifax, Britain’s largest building society, shows the average cost of a property fell 2.4 per cent in the year to July, leaving it around £9,000 below last year’s summer peak. 

Prices are dropping most drastically in the South East, where the average property is now worth £15,500 less than it was a year ago.

Halifax’s latest findings chime with those of Nationwide, which said last week that house prices fell at their fastest pace since 2009 in July. 

On the face of it, this might sound like good news for all those desperate to hop on the property ladder – though we must remember the reason house prices are falling: rising interest rates are pushing up the price of mortgage deals, meaning households are now spending the greatest portion of their income on mortgage payments since 1989. The average rate for a two-year fixed rate mortgage – which stood at 2.5 per cent in September 2021 – has now surpassed 6 per cent. 

So one could argue that falling property prices are anything but an equaliser – since it’s only those with enough savings to avoid taking out a big mortgage who stand to benefit. 

But Halifax claims the fall in property prices isn’t just down to rising borrowing costs. Buy-to-let landlords are also being deterred by Michael Gove’s looming renters reform bill. If it passes, landlords face tougher regulation, such as a ban on “no fault evictions”. 

Yet falling property prices must be placed within wider context, reminding us that prices are still steep by historical standards, even compared to before the pandemic struck. The average price of a home today has fallen by about £9,000 from its peak in August 2022 but remains around £25,000 above its level only two years ago. 

Kim Kinnaird, director of Halifax Mortgages, predicts that house prices will continue to fall over the next two years but anticipates it will be “a gradual rather than a precipitous decline.” 

She adds that activity among first-time buyers has actually held up pretty well, with many navigating higher borrowing costs by simply opting for smaller homes. 

Given that we are contending with the sharpest rice in interest rates in 35 years, you could say the property market is proving remarkably resilient – aided by low unemployment, strong wage growth and, of course, the enduring problem of supply and demand imbalances, created by a shortage of housing. 

Buyers can take some comfort in predictions from analysts who say that, although interest rates almost certainly haven’t peaked yet, average mortgage deals may have. Indeed, the Bank of England hiked rates again last Thursday for the fourteenth consecutive time yet two and five year fixed rate mortgages have hardly budged since then. This is because lenders had already priced in an increase. 

That said, for those waiting for their fixed-rate mortgages to expire, the pain of higher borrowing costs is yet to be felt. 

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