UK House Price Fall for Fifth Month in a Row Amid Grim Economic Outlook

Rows of houses in Hastings, England, on Aug. 5, 2020. (Dan Kitwood/Getty Images)

Average house prices in the UK fell for the fifth month in a row in January, as mortgage rates remain at a high level and the cost of living continues to soar.

According to the Nationwide building society, the average price of a home slid to £258,297 ($318,817) in January, a fall of 0.6 percent or almost £4,000 from the previous month.

Annual house price growth also slowed to 1.1 percent, from 2.8 percent in December, and the typical property value is now 3.2 percent lower than its August peak.

This is the lowest annual growth rate since June 2020, when house prices fell by 0.1 percent annually amid the COVID-19 pandemic.

The mortgage rates offered by lenders jumped following the “mini-budget” adopted by former Prime Minister Liz Truss and her chancellor Kwasi Kwarteng in September.

Their plan to fund a £45 billion package of tax cuts with government borrowing instead of spending cuts led to fears of unsustainable government debt levels. The ensuing turmoil in the financial markets caused the pound to fall steeply against the dollar and led to an increase in borrowing costs for both the government and British households.

While mortgage rates have been falling marginally in recent weeks, the Bank of England, the UK’s central bank, is expected to raise interest rates further on Thursday, having raised the rates from 3 to 3.5 percent in December, a 14-year high.

‘Too Early to Tell’

Robert Gardner, Nationwide’s chief economist, said: “There are some encouraging signs that mortgage rates are normalising, but it is too early to tell whether activity in the housing market has started to recover.

“The fall in house purchase approvals in December reported by the Bank of England largely reflects the sharp decline in mortgage applications following the mini-budget.

“It will be hard for the market to regain much momentum in the near term as economic headwinds are set to remain strong, with real earnings likely to fall further and the labour market widely projected to weaken as the economy shrinks.”

He added: “Should recent reductions in mortgage rates continue, this should help improve the affordability position for potential buyers, albeit modestly, as will solid rates of income growth, especially if combined with weak or negative house price growth.

“Nevertheless, the overall affordability situation looks set to remain challenging in the near term.”

Gabriella Dickens, a senior UK economist at Pantheon Macroeconomics, said: “Nationwide’s data show that house prices are continuing to buckle under the pressure of elevated mortgage rates, squeezed real incomes, and weak consumers’ confidence.”

Tom Bill, head of UK residential research at Knight Frank, said: “The UK housing market is headed for an annual fall in prices as mortgage rates remain notably higher than 12 months ago.”

He added: “We expect prices to decline 10 percent over the next two years as budgets get recalculated.”

But Iain McKenzie, chief executive of the Guild of Property Professionals, said he has seen “hope on the horizon.”

He said: “The affordability factor is the biggest concern for buyers right now, particularly those just starting on the property ladder. Mortgage rates went through the roof last year and shifted the goal posts for those saving for a deposit. It appears as though we are seeing some stability returning to the market.”

Grim Economic Outlook

The cost of living is continuing to rise, squeezing the budgets of British households.

According to the British Retail Consortium (BRC)-NielsenIQ Shop Price Index, prices are now 8 percent higher than they were last January, up from 7.3 percent in December and above the three-month average of 7.5 percent.

Overall food inflation rose to 13.8 percent from 13.3 percent in December, the highest inflation rate in the category on record.

Inflation on fresh food also reached a record high due to increased food production costs as well as elevated fruit and vegetable prices, accelerating to 15.7 percent from 15 percent in December.

According to research firm Kantar, grocery price inflation has hit a record 16.7 percent, adding a potential £788 to annual shopping bills.

The “staggering” 2.3 percentage point jump in the four weeks to Jan. 22 has exceeded the previous high recorded by Kantar in October and is the highest figure since their records began in 2008.

The International Monetary Fund (IMF) warned on Monday that the UK will be the only major economy to shrink this year, performing worse even than sanction-hit Russia.

In its latest World Economic Outlook update, the IMF upped its growth outlook for the global economy, but downgraded its UK GDP forecast once again, predicting a contraction of 0.6 percent against the 0.3 percent growth pencilled in last October.

The IMF said Britain’s predicted GDP fall reflects “tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets.”

But Chancellor of the Exchequer Jeremy Hunt said: “Short-term challenges should not obscure our long-term prospects—the UK outperformed many forecasts last year, and if we stick to our plan to halve inflation, the UK is still predicted to grow faster than Germany and Japan over the coming years.”

PA Media contributed to this report.