UK house prices unexpectedly fell in August, with rising mortgage costs putting pressure on buyers and slowing activity. According to the latest Nationwide data, the average home price dropped by 0.1% to £271,079 compared with July, defying economist forecasts of a 0.2% rise.
Annual house price growth also slowed to 2.1% in August from 2.4% the previous month, Britain’s largest building society reported.
Mortgage costs weigh on buyers
Robert Gardner, chief economist at Nationwide, said higher borrowing costs continue to squeeze affordability. “House prices remain high compared with household incomes, making deposits difficult to raise, especially with the cost of living still intense,” he noted.
He added that mortgage costs are now more than three times higher than in the post-pandemic years, creating a significant hurdle for first-time buyers. An average buyer with a 20% deposit now spends about 35% of take-home pay on mortgage payments, compared with a long-term average of 30%.
Interest rate cut offers little relief
The Bank of England cut its base rate by a quarter-point to 4% in August, marking the lowest level since March 2023. However, lenders have begun to price mortgage deals upwards due to rising swap rates. Mark Harris, chief executive of mortgage broker SPF Private Clients, said lenders also tend to limit their best offers during the summer months when staffing is reduced.
By the end of August, the average two-year fixed mortgage rate stood at 4.96%, while five-year deals averaged 5%, according to Moneyfacts.
Property tax concerns add pressure
Analysts also warned that the potential introduction of new property taxes in the autumn budget could dampen housing activity further. The Treasury is reportedly considering a tax on homes sold for more than £500,000, which could particularly affect sales in London and the South East.
Senior economist Elliott Jordan-Doak from Pantheon Macroeconomics said the prospect of higher property taxes could “throw sand in the gears” of the market.
Inflation complicates outlook
While the rate cut aimed to support the housing sector, inflation remains a challenge. Inflation rose to 3.8% in July, above forecasts and the Bank’s 2% target for the tenth consecutive month. The Bank of England now expects inflation to reach 4% in September, raising doubts about the speed of future interest rate cuts.
