Nationwide House Price Index: Prices fall 0.9% as high inflation and soaring borrowing costs take their toll

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, commented:

“Britain’s property market is showing clear signs of strain with prices falling almost 1% in October compared to September - the first monthly decline since 2021 - and the annual rate of growth cooling significantly as persistently high inflation and soaring borrowing costs take their toll on affordability.

“It means the pandemic-fuelled, red-hot market that became the norm over the past couple of years - as buyers sought out bigger properties in the race for space, aided by temporary stamp duty incentives to boost the market - is finally at an end with a much more sobering reality going forward.

“October was a month dominated by mortgage mayhem, as the fallout from former Chancellor Kwasi Kwarteng’s mini budget and the forced selling of gilts by defined benefit pension schemes due to their Liability Driven Investments backfiring sent the bond markets into a tailspin, raising fears of soaring base rates.

“Mortgage rates jumped as high as 6.65%* for an average two-year fixed product last month with lenders pulling almost 2,000 mortgage products as they took stock of a rather uncertain borrowing outlook. While the market has eased with the arrival of new Prime Minister Rishi Sunak heralding a more stable political environment, the Bank of England is still expected to push ahead with a 75-basis point base rate hike on Thursday.

“The outlook for the property market from here is far from rosy in the near-term as a gloomy cocktail of rising rates, falling real wages, a looming recession and sky-high inflation all dampen affordability levels. Mortgage borrowing was flat in September, according to recent BoE data, as Britain’s bleak economic reality hit home. Mortgage approvals dropped 10% as buyers either downgraded the size, location or value of the home they wanted to purchase, struggled to secure finance or pulled out of the market altogether.

“With the average two-year fixed mortgage now almost triple the level it was 12 months ago, it means the mortgage misery will continue with the number of people taking out new mortgages expected to fall further in the months ahead, dampening demand in the process.

“With house prices widely expected to contract significantly next year, anyone brave enough to buy in the current climate – whether a first-time buyer or those looking to refinance – will have some difficult decisions to make.

“Either they lock in an expensive fixed-rate deal to give them the security of regular payments or they take a gamble on a variable mortgage. While two-year fixed-rate deals now carry higher interest rates than longer terms deals, such as a five or 10-year product, variable mortgages can offer lower headline rates.

“Variable products, which include trackers linked to the BoE’s base rate, or discounted variable rates tied to a lender’s standard variable rate, might seem more attractive in the current climate but these can move up or down as interest rates change creating uncertainty. However, they can offer borrowers flexibility if they want to overpay or snap up a new deal further down the line when the market improves.

“To make the right decision, borrowers should seek the help of an independent mortgage broker who can calculate the best deal for their unique financial situation. What is clear is that prices may continue to soften in the months ahead, so those planning to buy must ensure it is a house they want to hold onto for a long time to give the market time to recover from a downturn and prevent them from ending end up in negative equity.”