UK house prices fall for first time this year amid rising interest rates

UK house prices fell in May for the first time this year, dropping 0.6% month-on-month, as rising mortgage rates linked to the war in Iran dampened demand [1]. The average home price was £278,024, up 1.7% annually, but growth slowed sharply from 3% in April [1]. The average two-year fixed mortgage rate stood at 5.68% at the end of May [1]. Robert Gardner, Nationwide's chief economist, said a loss of momentum was expected given uncertainty from the Middle East conflict and subsequent rises in energy prices and market interest rates [1]. The war has triggered a global fuel crisis, with the closure of the Strait of Hormuz—a conduit for around 20% of the world's oil trade—disrupting supplies and pushing up energy costs [4]. This has contributed to broader inflationary pressures, where a general increase in prices reduces the purchasing power of money [3]. Tom Bill of Knight Frank noted the slowdown is occurring when market momentum typically builds. "There won’t be a cliff-edge moment, but the impact of higher borrowing costs will erode spending power and squeeze house prices this year as mortgage rates agreed before the Middle East conflict gradually disappear," he said [1]. Estate agent Savills has revised its forecast, now predicting a 2% drop in average house prices this year instead of a 2% rise [1]. Gardner suggested any near-term softening could be short-lived if the shock passes quickly, as underlying swap rates imply only a partial reversal of earlier gains in mortgage pricing [1]. However, Martin Beck of WPI Strategy warned of underlying vulnerabilities: "Affordability is still stretched, mortgage repayments absorb a historically large share of household incomes, and a weakening labour market would pose a much greater threat to house prices than interest rates alone" [1]. Last week, Bank of England Governor Andrew Bailey indicated the central bank was in no rush to raise interest rates amid the ongoing uncertainty [1].