First fall in house prices in 15 months

We all knew it was coming, the only question was when? Now we have the answer. October's figures from Nationwide.

The growing pressure on household from high inflation, rising energy costs and interest rates rises has finally impacted the housing market. Nationwide's monthly report shows the first month-on-month drop in house prices since July 2021.

Nationwide's figures for October

.

October 2022

September 2022

Monthly change

-0.9%

0.0%

Annual change

+7.2%

+9.5%

Average price

£268,202

£272,259

Robert Gardner, chief economist, Nationwide

"The market has undoubtably been impacted by the turmoil following 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.

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

"The market seems set to slow in the coming quarters. Inflation will remain high for some time yet and Bank Rate is likely to rise further as the Bank of England seeks to ensure demand in the economy slows to relieve domestic price pressures.

"The outlook is extremely uncertain, and much will depend on how the broader economy performs, but a relatively soft landing is still possible."

Uneven distribution of price falls

Earlier this month, Capital Economics reminded us that there are three factors determining affordability: house prices. mortgage rates and household income. With interest rates being uniform, the relationship between incomes and house prices is a good indicator of how price falls will play out regionally. They suggest that those areas where house prices are the highest multiple of income - the South East - are likely to see the greatest falls, with the North and Midlands less affected.

They also expect housebuilders to repeat their previous response to property price falls - cut back construction. They forecast that new starts will fall from 178,000 this year to 110,000 in 2023 and 2024, suggesting that new builds will continue to be priced at a premium.