UK house prices tumble 4.6% in August as high interest rates cool demand

Introduction: UK house prices drop 4.6% in year to August

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

UK house prices have fallen at their fastest rate since the aftermath of the financial crisis, new data confirms this morning, as high interest rates cool the property sector.

Halifax, the UK’s largest lender, has reported that the average property price fell by 4.6% on an annual basis in August, down from the record highs seen last summer. That’s the largest year-on-year decrease in house prices since 2009.

The price of a typical UK home dropped to £279,569, down by around £14,000 over the last year, back to the level seen in early 2022. It leaves average prices around £40,000 above pre-pandemic levels.

That’s a bigger fall than expected, with economists having predicted a 3.45% annual fall.

On a monthly basis, the average house price fell by -1.9% in August, the largest monthly fall since November 2022.

UK house prices to August Photograph: Halifax

Halifax reports that Southern England and Wales are seeing most downward pressure on property prices, with Scotland showing greater resilience.

Rival lender Nationwide reported last week that UK house prices fell 5.3% in August, the fastest annual drop in 14 years.

But there are signs that UK borrowing costs could be close to their peak. Yesterday, Bank of England governor Andrew Bailey said interest rates are probably “near the top of the cycle”, and predicted there willl be a further “marked” drop in inflation this year.

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But for now, higher rates are cooling the markets.

Kim Kinnaird, director at Halifax Mortgages, says:

“It’s fair to say that house prices have proven more resilient than expected so far this year, despite higher interest rates weighing on buyer demand. However, there is always a lag-effect where rate increases are concerned, and we may now be seeing a greater impact from higher mortgage costs flowing through to house prices.

Increased volatility month-to-month is also to be expected when activity levels are lower, though overall the pace of decline remains in line with our outlook for the year as a whole.

Kinnaird adds that some prospective buyers deferred their transactions in the hope of some stability in the markets, and greater clarity on the future direction of rates in the coming months.

The market will continue to rebalance until it finds an equilibrium where buyers are comfortable with mortgage costs in a higher range than seen over the previous 15 years.

The agenda

7am BST: Halifax house price index for August
7am BST: German industrial production data for July
10am BST: Eurozone Q2 GDP (second estimate)
1.30pm BST: US initial jobless claims

Key events

UK businesses expect to raise their prices at a slower rate over the next 12 months, new data from the Bank of England shows.

The BoE’s latest Decision Maker Panel, just released, shows that businesses expect output price inflation to fall over the next year.

Year-ahead output price inflation was expected to be 4.9% in the three months to August, down 0.5 percentage points compared to the three months to July. Expected inflation has been gradually falling over the last year.

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The survey of Chief Financial Officers also found that CPI inflation is forecast to be 4.8% in a year’s time, down from the 5.4% expected a month ago.

Firms expect to raise pay by 5%, the same as last month, which is rather lower than realised wage growth, which was at 6.9% in both the single month data and the three months to August, the BoE adds.

Monthly Decision Maker Panel data – August 2023

The Decision Maker Panel (#DMP) is a survey of Chief Financial Officers from small, medium and large #UK businesses. We use it to monitor developments in the economy and to track businesses’ views.#BOE pic.twitter.com/ofixkNfEx3

— Markets Today (@marketsday) September 7, 2023

Full story: Biggest drop in UK house prices in 14 years

Kalyeena Makortoff

UK house prices suffered their sharpest annual drop in 14 years, as the seasonal summer slump and high mortgage costs dragged on sales.

Data released by Halifax, Britain’s biggest mortgage lender, said on Thursday that prices fell by 4.6% in August, marking the biggest year-on-year decrease since 2009.

It means that the price tag of the typical UK home has dropped by about £14,000 over the past 12 months to about £279,569. That is the lowest level since early 2022, but still leaves average prices £40,000 higher than before the pandemic, when lockdowns fuelled demand for larger homes in a ‘“race for space”.

The latest annual decline, however, suggests homeowners continue to be deterred by high interest rates, which have been hiked by policymakers in an attempt to combat inflation but fuelled higher mortgage costs. More here.

📉 Property prices dropped by -4.6% on an annual basis according to @HalifaxBank, from -2.5% in July, though prices were at a record peak last summer

A typical UK home now costs £279,569, down by around £14,000 over the last year & back to the level seen in early 2022. pic.twitter.com/31ZSGUrhWN

— Henry Pryor  (@HenryPryor) September 7, 2023

T. Rowe Price: Prices will keep falling

Tomasz Wieladek, chief European economist at T. Rowe Price, has predicted that UK house prices will continue to fall sharply in the coming months.

Wieladek believes the worst is yet to come for the housing market:

UK house prices will continue to fall at a sharp rate, with the point of greatest pressure for the market still ahead of us. A peak-to-trough decline of 15% is the most likely outcome in my view, while a 20% drop is possible in a more adverse scenario.

House prices will continue to fall at a rapid rate well into next year for a number of reasons. Clearly, the cost of a mortgage has increased sharply with the Bank of England’s policy rate. Although mortgage rates have come down a little from the peaks, the mortgage payment increase for anyone refinancing today compared to two years ago will be huge. Among all the other pressures from higher inflation, this will put significant pressure on households.

Rising unemployment is likely to lead to more people defaulting on their loans, Wieladek fears:

Because the unemployment rate will keep rising, mortgage defaults will likely rise, which is when the housing market will be under the most pressure in this cycle.

This moment is still ahead, not behind, us. With wage and price inflation still very high, the Bank of England will not come to the rescue any time soon, as it needs greater slack in the labour market to squeeze wage inflation out of the economy. Instead, rates are more likely to keep rising given the latest inflation data.

The latest mortage rates data has just arrived, from Moneyfacts, showing a small drop in the cost of five-year loans today.

They say:

The average 2-year fixed residential mortgage rate today is 6.67%. This is unchanged from the previous working day.
The average 5-year fixed residential mortgage rate today is 6.16%. This is down from an average rate of 6.17% on the previous working day.

Today’s data from Halifax paints another worrying picture for homeowners looking to sell, as some prospective first-time buyers shun the market, says Karen Noye, mortgage expert at Quilter.

But if interest rates do stabilise, that could encourage buyers back.

Nye explains:

The current scenario, where the rates might remain consistent, could act as a magnet, drawing first-time buyers back into the housing fold.

First-time buyers are often considered the lifeblood of a healthy housing market. Their activity stimulates demand, ensuring a steady flow of transactions from the bottom up. The recent slump in house prices, as reported by Halifax, can be attributed to the conspicuous absence of these buyers. With more predictability in interest rates, we might see a resurgence in demand, potentially leading to a soft landing for house prices, rather than a sharp decline.

The pound has slipped to a new three-month low this morning.

Traders are digesting Bank of England governor Andrew Bailey’s prediction yesterday that UK interest rates are near their peak.

This has pushed sterling to $1.247 this morning.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says Bailey’s comments are “a glimmer of light for UK borrowers”, adding:

Comments from Andrew Bailey have sent the pound sharply lower, below $1.25 to a level not seen since June. Speaking to MPs, he said the UK is much nearer now to the top of the cycle. So, not only is the Bank of England forecast to go softer on rate hikes going forward, with this month’s expected increase now potentially the last, the bets are that the Fed might step back on the pedal after a brief pause.

This marks a considerable reversal of expectations compared to just a few weeks ago, as data has filtered through showing a sharper weakening of business activity in the UK, while in the US the services sector is still pumping.

Competition authorities examine if pet owners are being overcharged at the vet

In the City, shares in Pets at Home have dropped by 10% after competition authorities launched a probe into veterinary services.

The Competition and Markets Authority (CMA) is concerned that the cost of vet services has risen faster than the rate of inflation, and that pet owners may not be given the information they need about prices and treatment options.

The CMA is keen to hear more about pet owners’ and vet practitioners’ experiences of:

Pricing of services, including whether pet owners were aware of how much a treatment would cost, and how they pay for it (whether they pay themselves or via insurance)
How prescriptions and medication for pets are arranged and sold
Choosing a vet surgery and whether people are aware that their vet may be part of a larger chain which might also own other surgeries in the area
Using out-of-hours and emergency vet services where options might be limited

Sarah Cardell, chief executive of the CMA, says it’s very important that people get clear information and pricing to help them make the right choices.

Cardell adds:

There has been a lot of consolidation in the vet industry in recent years, so now is the right time to take a look at how the market is working.

When a pet is unwell, they often need urgent treatment, which means that pet owners may not shop around for the best deal, like they do with other services. This means they may not have the relevant information to make informed decisions at what can be a distressing time. We want to hear from pet owners and people who work in the sector about their experiences.

Are pet owners being overcharged at the vet?

George Lusty from the Competitions and Markets Authority tells #R4Today it’s launched a review ‘to make sure people can predict’ the cost of vet services, as they’re rising faster than other bills.

— BBC Radio 4 Today (@BBCr4today) September 7, 2023

Fourteen consecutive rate rises from the Bank of England are weighing on mortgage affordability, pushing down house prices, points out Victoria Scholar, head of investment at interactive investor.

This has prompted sellers to negatively recalibrate their asking prices as property demand softens. Halifax anticipates that this trend will continue with further weakness coming through this year into next. While falling house prices can help first-time buyers get onto the housing market, many individuals and families are facing a perfect storm, stuck with the dilemma of deciding between extortionate rental costs or hefty monthly mortgage repayments.

Despite this, both Nationwide and Halifax have taken a relatively optimistic stance on the market’s decline. Nationwide anticipates a ‘soft landing’ rather than a housing crash and Halifax said that house prices ‘have proven more resilient than expected so far this year.’

🇬🇧 𝗨.𝗞. 𝗛𝗢𝗨𝗦𝗘 𝗣𝗥𝗜𝗖𝗘𝗦 𝗗𝗥𝗢𝗣 𝗠𝗢𝗥𝗘 𝗧𝗛𝗔𝗡 𝗘𝗫𝗣𝗘𝗖𝗧𝗘𝗗

Halifax House Price Index (MoM):
Actual: -1.9% 🔴
Expected: -0.3%
Previous: -0.4%

(YoY):
Actual: -4.6% 🔴
Expected: -3.5%
Previous: -2.5% pic.twitter.com/HdNAHVhCzQ

— PiQ (@PriapusIQ) September 7, 2023

Looking back through the data, the 4.6% drop in prices in August is the biggest annual decline since October 2009.

2009 was a rough year for the housing market, following the collapse of Lehman Brothers the previous autumn.

House price deflation peaked in spring 2009, with prices down 17.7% per year in both February and April 2009.

Estate agents report that potential buyers are negotiating house prices down.

Nathan Emerson, CEO of Propertymark, reports that more houses are selling below their asking price:

“House prices are thankfully adjusting to more sensible levels alongside increases to people’s earnings and the number of properties selling below asking price is increasing, offering homebuyers the opportunity to negotiate. These factors are all playing a part in increasing homebuyers’ affordability and softening the blow of rising interest rates.

“However, despite how this may look on the face of things, sellers are rightly still motivated to sell as they continue to make a healthy gain on their property price.”

Matt Thompson, head of sales at Chestertons, says:

“With higher interest rates impacting on UK households, property buyers are adopting a more strategic and flexible property search by adjusting their budget or widening their search criteria to find a suitable home.

Although some buyers took a break during the August holidays, others utilised last month to enter price negotiations or seal the deal by signing contracts.”

Avg house prices melt under the Aug heat, dropping -1.9% in a month & -4.6% annually, making the typical home now worth £279,569. Peeling back prices by £14,000 on last year but still up £40,000 on pre-pandemic levels @HalifaxBank pic.twitter.com/wQVckQi9ii

— Emma Fildes (@emmafildes) September 7, 2023

Jeremy Leaf, north London estate agent, warns that sellers who don’t accept price reductions may not get a deal:

“Prices continue to soften although they are supported to a degree by the shortage of stock and fewer but more serious buyers.

With so many rate rises, affordability is a concern, especially for those on tighter budgets, often buying smaller properties so the market remains price sensitive.

The penny has dropped for the majority of sellers who are recognising that they may not achieve what they originally anticipated. As many sellers are also buyers, they realise that although they may have to accept less than they initially wanted for their property, they will also pay less for their next home which is significant as many will be trading up.

Those sellers who refuse to recognise that prices are softening will remain on the market and may end up having to accept a lower price in order to make their move.’”

Prices fall fastest in South East, slowest in Scotland

House prices have fallen all UK nations and the nine English regions over the last year, Halifax’s house price index shows.

But the north of the country has proved more resilient than the south.

Prices are falling fastest in the South East of England, where a 5% fall in the last year has pulled the average house price down to £379,565.

Halifax says:

Buyers faced with the need to find larger deposits and fund bigger monthly repayments means the South East is experiencing the biggest drop.

London remains the most expensive place in the UK to purchase a home, with an average property price of £529,814. However with prices down by -4.1% over the last year, it has seen the biggest fall of any region in cash terms (-£22,777).

Prices have fallen by 4.7% in the last year in Wales, which had boomed in the pandemic race-for-space, with the average house price now £212,967.

In Northern Ireland property prices have fallen by -1.5% annually, to an average of £182,700.

But prices fell slowest in Scotland, where they are down just -0.6% over the last year, to an average of £201,932.

Halifax: We expect further downward pressure on property prices

Looking ahead, Halifax predicts there will be “further downward pressure on property prices” through to the end of this year and into 2024.

Kim Kinnaird, director of Halifax Mortgages, points out, though, that house price affordability measures have improved.

While any drop won’t be welcomed by current homeowners, it’s important to remember that prices remain some £40,000 (+17%) above pre-pandemic levels.

It may also come as some relief to those looking to get onto the property ladder. Income growth has remained strong over recent months, which has seen the house price to income ratio for first-time buyers fall from a peak of 5.8 in June last year to now 5.1. This is the most affordable level since June 2020, and will be partially offsetting the impact of higher mortgage costs.