Volatility in UK interest rates leads to decline in house prices: impact on housing affordability

UK House Prices Fall at Fastest Rate in 14 Years

According to a recent report by Nationwide Building Society, the average UK house price has fallen at the fastest annual rate in 14 years. Property values declined by 3.8% on average annually in July, marking the weakest reading since July 2009. House prices dropped by 0.2% month-on-month in July, reaching an average of £260,828. The price of a typical home is now 4.5% below the peak in August 2022.

Volatility in investors' views about the path of UK interest rates

Volatility in investors' views about the path of UK interest rates has led to the decline in house prices, according to Robert Gardner, the chief economist at Nationwide. Despite recent tempering of expectations, longer-term interest rates remain elevated, affecting mortgage pricing and stretching housing affordability for those looking to buy a home with a mortgage.

Impact on housing affordability

Gardner provided an example of a prospective buyer earning the average wage and looking to buy a typical first-time buyer property with a 20% deposit. Monthly mortgage payments would account for 43% of their take-home pay, assuming a 6% mortgage rate. This is up from 32% a year ago and well above the long-run average of 29%. Additionally, deposit requirements continue to present a high hurdle, with a 10% deposit equivalent to 55% of gross annual average income.

Positive outlook

However, Gardner noted that unemployment is expected to remain low, and the majority of existing borrowers should be able to handle higher borrowing costs. The Bank of England base rate currently stands at 5% and is expected to potentially rise further to quell inflation.

Housing affordability

Today's concept is housing affordability. Housing affordability refers to the ability of individuals or families to comfortably afford housing costs, including mortgage payments, rent, and utilities, without experiencing financial strain. Affordability challenges, such as rising house prices and interest rates, can make it difficult for individuals to enter the housing market or maintain their current housing situation. Factors such as income levels, interest rates, and deposit requirements play a significant role in determining housing affordability.