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UK house prices fall ahead of Bank of England interest rates decision

Residential living in West London, UK
House prices fell last month for the first time in more than a year. Photo: Getty

House prices fell last month for the first time in more than a year as higher mortgage rates and political turmoil take a toll.

The average price of a home in the UK dropped 0.9% to £268,282 in October, first monthly decline since July 2021 and the biggest decrease since June 2021, according to figures from the Nationwide Building Society.

Annual growth in house prices slowed from 9.5% to 7.2%.

The building society predicted that prices would continue to ease in the months ahead as interest rates continue to rise due to Bank of England action to tackle inflation.

Robert Gardner, the Nationwide chief economist, said: “The market has undoubtedly been impacted by the turmoil after the mini-budget, which led to a sharp rise in market interest rates. Higher borrowing costs have added to stretched housing affordability at a time when household finances are already under pressure from high inflation.”

Read more: UK mortgage approvals drop 10% as interest rates rise

Kwarteng’s plan for unfunded tax cuts drove up the cost of mortgages, with many deals vanishing, as the money markets anticipated a very sharp hike in UK interest rates.

The increase in mortgage rates meant that a first-time buyer (FTB) earning the average wage and looking to buy a typical FTB home with a 20% deposit would experience a rise in their monthly mortgage payment from 34% of take-home pay to 45%, based on an average interest rate of 5.5%. This is similar to the ratio prevailing before the financial crisis, Gardner said.

Jonathan Hopper, CEO of Garrington Property Finders, said buyers can play ‘hardball’ by refusing to pay asking prices: “The chaotic aftermath of the mini-Budget sent tremors through the property market that left both buyers and sellers shaken.

“The worst of it is, we’re likely to feel the aftershocks for months to come.

“A fundamental recalibration of what’s affordable is underway. Fewer mortgages are available, with interest rates having gone up in an express lift, rather than the gradual escalator we’d been expecting.

Read more: UK house prices set to fall in 2023 amid higher mortgage rates

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The fall in Nationwide’s index in October – the first for 15 months and the sharpest since June 2020 – provides the strongest signal yet that house prices will buckle in the face of the surge in mortgage rates and the squeeze on real disposable incomes.”

Nicky Stevenson, managing director at estate agent Fine & Country, said: “Transaction levels are likely to continue easing in the near term as the housing market adjusts to this new era of higher interest rates.”

Watch: How does inflation affect interest rates?