British house prices fell unexpectedly in May, with two of the country’s largest mortgage lenders reporting declines that point to a cooling market as higher borrowing costs and the conflict in the Middle East weigh on buyer demand.
The figures from Halifax and Nationwide arrive as the Bank of England faces a shift in expectations, with financial markets now anticipating that interest rates could rise later this year rather than fall, a reversal driven largely by the inflationary effects of the war on Iran.
A Widening Retreat in Prices
Halifax reported that house prices fell by 0.1 per cent on the month in May, matching April’s decline and marking a third consecutive monthly fall, according to data published on Friday. A Reuters poll of economists had pointed to a rise of 0.1 per cent. On an annual basis, prices were 0.5 per cent higher, well short of the 1 per cent increase the poll had forecast.
The weakness was most pronounced in the south. The average home in London cost £534,375 in the month, down 1.5 per cent on a year earlier, according to the Halifax House Price Index, while in the South East the typical price was £382,704, a fall of 2.1 per cent. Nationally, Halifax put the average price at £298,806.
The survey echoed findings from Nationwide, which recorded a 0.6 per cent monthly drop, its first decline of the year and a steeper fall than the 0.2 per cent that economists had expected. The lender said the average home was worth £278,024, with annual growth slowing to 1.7 per cent from 3 per cent in April.
Amanda Bryden, head of mortgages at Halifax, said property price trends continued to reflect the uncertainty linked to developments in the Middle East. Despite recent cuts to mortgage rates, she added, higher inflation expectations had kept borrowing costs above the level seen at the start of the year, continuing to stretch affordability for many buyers.
Borrowing Costs and the Bank of England
The slowdown traces back to the cost of borrowing. Average mortgage rates in Britain have climbed by almost a full percentage point since the start of the war in the Middle East, according to industry figures. The typical two-year fixed deal stood at 5.68 per cent at the end of May, against 4.83 per cent in late February, while the five-year fix was 5.63 per cent, according to the data provider Moneyfacts.
That increase has reshaped affordability. A typical buyer spent 37 per cent of their salary on mortgage repayments in May, nearly ten percentage points above the pre-pandemic level of 28 per cent, according to the estate agency Hamptons.
The conflict has also altered the path of monetary policy. The Bank’s base rate stands at 3.75 per cent, while consumer price inflation is running at 2.8 per cent, above the 2 per cent target and expected to rise further as higher energy prices feed through. With the Strait of Hormuz, a route for around a fifth of the world’s seaborne oil and gas, effectively closed, markets now price in one or possibly two quarter-point rises by the end of the year.
Rate-setters meet on 18 June, though investors see only about an 11 per cent chance of a move then. At the committee’s previous vote, members split eight to one in favour of holding, with the chief economist, Huw Pill, the lone voice for a quarter-point rise to 4 per cent. James Smith, an economist at ING, said a hike in July remained possible if energy flows through the Strait did not durably improve, while noting that Governor Andrew Bailey appeared less convinced.
Estate agents said the seasonal spring upturn had failed to materialise. Tom Bill, head of UK residential research at Knight Frank, said the market had slowed at precisely the time of year when momentum would usually be building, and warned that higher borrowing costs would erode spending power through the year. Savills has revised its forecast to a 2 per cent fall in prices this year, having previously expected a 2 per cent rise, citing the war’s effect on its outlook.
Adding to the pressure, the Renters’ Rights Act came into force during the month, abolishing Section 21 no-fault evictions and ending fixed-term tenancies. Some economists said the reforms had prompted landlords to sell, lifting the supply of homes for sale, though others doubted the change had materially moved prices in May alone.
