Nationwide: House prices see biggest dip since 2012

House prices recorded their first annual fall in nearly three years in February, Nationwide’s house price index showed, a further sign the house price bubble might be about to burst.

Though house prices have been falling, this is the first time we have seen an annual drop. Annual house price growth fell 1.1% in February compared to the same month last year, making for the weakest reading since November 2012. The average price tag on a UK home is now £257,406, down from £258,297 in January.

Prices fell 0.5% between January and February, the sixth price fall in a row, leaving prices 3.7% below their pre-pandemic peak.

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“The recent run of weak house price data began with the financial market turbulence in response to the mini-Budget at the end of September last year,” said Robert Gardner, Nationwide’s chief economist. Financial market conditions have begun to stabilise, but clearly buyers remain concerned about whether now is a good time to buy a house.

Mortgage rates have begun to fall from their September peak of 6.65%, but remain elevated at around 5%. This combined with the rising cost of living due to inflation has sunk buyer demand to its lowest level since 2019, forcing sellers to knock off as much as £14,000 off their asking prices.

House prices boomed throughout the pandemic, but the latest data from Zoopla shows homes are shedding up to a third of the £42,000 gain made over the last three years. Does this mean the house price bubble might be about to burst?

The buyers’ market returns

Buyers have been buffeted by financial pressures over the last year. “Inflation has continued to outpace wage growth and mortgage rates remain significantly higher than the lows recorded in 2021,” says Gardner.

“The biggest annual fall in house prices in over a decade marks a significant psychological shift in the housing market favouring buyers who have been waiting in the sidelines because they haven’t been able to make the numbers work,” says Myron Jobson, senior personal finance analyst at interactive investor.

“Buyers are bossing it in the market right now,” adds Susannah Streeter, head of money and markets at Hargreaves Lansdown added. “They know they have the upper hand, given overall interest is so weak so they are clearly bullish about getting reductions from sellers.”

Additionally data from Zoopla’s house price index showed the volume of properties for sale has increased by 60% from 2022, meaning buyers have more choice and therefore able to drive a harder bargain.

Where next for UK house prices?

Mortgage rates are falling, and some lenders are starting to offer fixed-rate deals below the base rate for the first time since the mini-Budget.

But buyers’ purchasing power is being hit by higher living costs due to rising bills, on everything from energy costs to council tax, and increased mortgage repayments are making many rethink their plans.

“Since the start of 2023 there has been some hope within the market that falling mortgage rates would bring more buyers back, so falls would remain in single digits, and we’d soon be back on track,” says Sarah Coles, head of personal finance at Hargreaves Lansdown. “This remains a real possibility. However, there are a number of factors that could derail this view.

“While mortgage rates are still expected to fall this year, it’s not going to be a straight line. Recent spending and wage figures are raising the spectre of higher inflation lasting longer than had been expected.”

That could prompt the Bank of England to continue increasing its base rate. Currently it sits at 4% following 10 consecutive increases. A further hike could push mortgage rates up again.

“The market was pricing in a 0.25 percentage point rise later this month, but now it has started pricing in a 0.5 point rise, so some of the most competitive fixed rate mortgages have been pulled, and some lenders are repricing higher,” says Coles. “This doesn’t mean the mortgage market has changed direction completely, but even a small blip is likely to take a toll on the fragile confidence of buyers.

“This is combined with the depressing effect of a stagnating economy and the threat of recession. Buyers who are worried about rising prices and the risk of losing their jobs may well decide that this is the wrong time to take on a huge mortgage and make themselves a hostage to rising rates.”