Nationwide’s Robert Gardner also predicts that the UK housing market could pick up strrength if the Middle East crisis eases:
Housing affordability had been improving steadily in recent years due to a combination of income growth outpacing house price growth by a wide margin and a modest decline in borrowing costs.
“While market interest rates have risen in recent months, the impact on affordability has so far been modest. Indeed, swap rates, which underpin fixed‑rate mortgage pricing, remain well below the highs reached in 2023 and are broadly in line with levels prevailing in 2024, implying only a partial reversal of earlier gains.
“This provides some confidence that, if the latest shock passes relatively quickly, and energy prices normalise in the quarters ahead, any near-term softening in the housing market will also prove short lived.”
This chart shows how UK house prices have now dipped back from their record high:
Introduction: House prices fell in May
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
UK house price fell last month for the first time this year, as the Iran war drove up borrowing costs and weakened demand.
Lender Nationwide has reported that prices fell by 0.6% in May, the first monthly drop since last December, as the recent rise in mortgage rates weakened demand from buyers.
That pulled the annual rate of house price inflation down to 1.7% in May, down from 3% in April, with the average price of a property now slipping to £278,024.
Robert Gardner, Nationwide’s chief economist, says:
“Given the uncertainty caused by developments in the Middle East and the subsequent rise in energy prices and market interest rates, some loss of momentum was to be expected. Indeed, consumer confidence has weakened noticeably since the start of the conflict, with GfK’s headline index falling to its lowest level since late‑2023 in April, with only a marginal increase in May.
“Measures of housing market sentiment have also deteriorated. The Royal Institution of Chartered Surveyors reported a sharp fall in new buyer enquiries in March, taking the index to its weakest reading since 2023 and remained deep in negative territory in April
Martin Beck, chief economist at WPI Strategy, says this suggests the UK housing market’s recent resilience is “being tested” by the rise in borrowing costs after the Middle East crisis began.
Beck added:
“May’s fall should not be overinterpreted, but it does underline the pressure facing buyers. Weak consumer confidence, sluggish income growth and mortgage rates that remain far above the ultra-low levels seen for much of the last decade-and-a-half are continuing to weigh on affordability.
“While those headwinds make it hard to see house prices returning to consistent growth in the near-future, the US-Iran ceasefire and recent diplomatic developments have reduced the risk of a more severe shock to inflation, borrowing costs and the housing market.
UK average mortgage rates did drop at the end of last week, amid hopes of a breakthrough in the US-Iran peace talks.
But generally, the market is tough, especially for first-time buyers. They face the most challenging conditions since the financial crisis, the boss of Britain’s largest housebuilder warned last week.
The agenda
7am BST: Nationwide house price index for May
9am BST: Eurozone manufacturing PMI for May
9.30am BST: UK manufacturing PMI for May
3.30pm BST: Sir Alan Bates to give evidence to MPs on government compensation schemes
Updated
