UK house prices unexpectedly fell in August as high mortgage costs dampened activity.
The average price for a home dropped by 0.1% to £271,079 compared with July, according to Nationwide Building Society. Economists had expected a rise of 0.2%, according to a poll by Reuters.
The annual rate of house price growth slowed to 2.1% in August, from 2.4% in July, Nationwide said.
Robert Gardner, chief economist at Nationwide, said higher borrowing costs were squeezing buyers’ budgets and pushing down prices.
“House prices are still high compared with household incomes, making raising a deposit challenging for prospective buyers, especially given the intense cost of living pressures in recent years,” he added.
“Combined with the fact that mortgage costs are more than three times the levels prevailing in the wake of the pandemic, this means that the cost of servicing a mortgage is also a barrier for many.”
An average first-time buyer paying with a 20% deposit faced a monthly mortgage payment equivalent to about 35% of their take-home pay, he said. That compared with a long-run average of 30%.
Affordability is still stretched, despite the fact that the Bank of England’s monetary policy committee voted in August to cut the base rate by a quarter-point to 4%.
The cut took borrowing costs to the lowest level since March 2023. However, Mark Harris, chief executive of the mortgage broker SPF Private Clients, said some lenders had begun to price their mortgage deals upwards.
“The mixed picture is down to rising swap rates, which underpin the pricing of fixed-rate mortgages, and lenders not wanting to offer the best rates during the summer months when staff are on holiday and resources are limited,” he added.
The average two-year fixed mortgage rate was 4.96% at the end of August, according to Moneyfacts. The average rate for a five-year deal was 5%.
In July house prices rose 0.6%, according to Nationwide, as the market recovered from a dip in June after the end of a tax break on stamp duty.
Separate figures published on Monday by the Bank of England showed that lenders approved 65,400 mortgages in July, up by 800 compared with the previous month and the highest reading since January.
Some lenders are also allowing first-time buyers to borrow more, after intervention by the City regulator and new guidelines from the Bank of England designed to help more people on to the housing ladder.
On Monday HSBC UK became the latest lender to announce a bigger loan-to-income (LTI) multiple cap of up to 5.5 times salary for first-time buyers who meet specific criteria, including a minimum sole-applicant income of £35,000 and a minimum joint-applicant income of £55,000. The previous cap was 4.49 LTI.
First Direct, one of HSBC’s brands, is also introducing a new LTI cap at 5.5 for some first-time buyers.
Elliott Jordan-Doak, a senior economist at Pantheon Macroeconomics, said the possibility of property tax rises in Rachel Reeves’s autumn budget had “the potential to throw sand in the gears of housing activity”.
The Guardian revealed that the Treasury was considering a new tax on the sale of homes above £500,000, which some market watchers said could slow activity in the short term, especially in London and the south-east.
While the Bank of England cut interest rates last month, it raised concern about inflationary pressures in the economy that could slow the rate of further cuts.
Inflation rose to 3.8% in July, more than expected, amid higher food prices and travel costs. Inflation has now been above the central bank’s 2% target for 10 months in a row. The Bank has predicted it will reach 4% in September.
