The Nationwide house price index for May showed that the annual rate of growth also slipped to -3.4 per cent, down from an annual growth rate of -2.7 per cent in April.
This is also the largest decline in the annual growth rate since July 2009 when there was a -6.2 per cent year-on-year drop.
Robert Gardner, chief economist at Nationwide, said the softening of growth in May reflected flat house prices when taking seasonal effects into account and said prices remained four per cent below the August 2022 peak.
He added: “Headwinds to the housing market look set to strengthen in the near term.
“While consumer price inflation did slow in April, it was a much smaller decline than most analysts had expected. As a result, investors’ expectations for the future path of bank rate increased noticeably in late May, suggesting it could peak at around 5.5 per cent, well above the 4.5 per cent peak that was priced in around late March. Furthermore, rates are also projected to remain higher for longer.”
Nationwide now predicts the base rate to remain slightly above four per cent in the long term, an update from its previous view that the rate would drop to just above three per cent.
Gardner said if this was maintained, it would put “renewed upward pressure” on mortgage rates which were starting to fall after the mini Budget.
He added: “Nevertheless, in our view a relatively soft landing remains the most likely outcome since labour market conditions remain solid and household balance sheets appear in relatively good shape.
“While activity is likely to remain subdued in the near term, healthy rates of nominal income growth, together with modestly lower house prices, should help to improve housing affordability over time, especially if mortgage rates moderate once bank rate peaks.”
An uncertain market
After Nationwide recorded an increase in house prices in April, industry professionals pointed out that May’s data highlighted the uncertain mood of the market which has been further disrupted by inflation.
Ross McMillan, owner of Blue Fish Mortgage Solutions, said May “started encouragingly and then swerved violently in the past week or so”.
He said it was difficult to gauge how this impacted the overall housing market but said first-time buyer appetite appeared to be strong.
He added: “Ongoing turmoil and uncertainty around rates and availability of products is, however, a hammer blow to any thoughts of recovery in the buy-to-let sector, which now seems set for a long period on the naughty step whilst lenders and investors consider their next moves.”
Craig Fish, managing director at Lodestone, added: “Just when you thought the market was stabilising, the inflation data emerged and triggered turmoil in the mortgage market. We were witnessing more normal levels of property activity in May, but there are now concerns about how much higher rates could go.
“Activity could stagnate moving forward as people take stock. We have already had some clients tell us that their property plans are on hold until things settle down. The hope is that as inflation drops, conditions will improve and we could see a strong end to 2023, which should continue into 2024.”
Chris Hodgkinson, managing director of House Buyer Bureau, Chris Hodgkinson, said the market had been “inconsistent” this year and uncertainty was “proving problematic” for buyers and sellers who were going back and forth over sale prices.
“The consequence of this back and forth is a more protracted transaction timeline and a greater threat of sales falling through. That said, buyer activity is building and while the current landscape is certainly more difficult, those who are able to negotiate it are still securing a good price for their home,” he added.
Rohit Kohli, director at The Mortgage Stop, said: “May was a solid month overall but, after the latest inflation data, ended on a mad note. The rest of 2023 now looks uncertain.”
He said the Bank of England’s next move regarding the base rate could raise caution and slow the market further.
Kohli added: “Higher costs could reduce affordability, potentially suppressing activity and lowering house prices. This could also increase arrears and repossessions as homeowners shift onto higher payments.”
