UK house prices fell unexpectedly in May, marking the third consecutive monthly decline, as rising mortgage rates fueled by the war in Iran continued to impact affordability and homebuyer demand.
The average price of a typical UK home decreased by 0.1% in May to £298,806 compared with April, according to the lender Halifax. Analysts had anticipated a return to growth, forecasting a 0.1% rise. The drop followed declines of 0.1% in April and 0.5% in March.
Impact of Iran War on Mortgages
"Property price trends continue to reflect the uncertainty linked to developments in the Middle East," said Amanda Bryden, head of mortgages at Halifax. "Despite recent cuts to mortgage rates, higher inflation expectations have kept borrowing costs above the level seen at the start of the year, continuing to stretch affordability for many buyers and temper demand."
On an annual basis, house prices grew by 0.5%, up slightly from 0.4% in April, but well below analysts' expectations of 1% growth. Bryden noted that prices are expected to remain broadly stable in the coming months despite stubbornly high mortgage rates. Halifax has halved its forecast for annual house price growth this year.
Mortgage Rate Trends
According to Moneyfacts, the average two-year fixed mortgage rate stood at 5.66% on Thursday, up from 4.83% at the start of March. The average five-year fixed-rate mortgage was 5.62%, up from 4.95%.
Jason Tebb, president of OnTheMarket, described the current market as the strongest buyers' market in years, with ample stock. "Little movement in average house prices suggests buyers and sellers are adopting a pragmatic outlook and adjusting expectations rather than a loss of confidence," he said. "Steadier prices are better for first-time buyers, as there is less risk of being priced out further."
However, Halifax's Bryden indicated that growth in activity among first-time buyers was more subdued.
Inflation and Energy Prices
UK inflation slowed to 2.8% in April, the lowest rate in over a year, partly due to a reduction in the household energy price cap offsetting a sharp rise in fuel prices since the start of the Middle East conflict. Nonetheless, economists expect inflation to rise in the coming months, including a 13% increase in the household energy price cap from July to £1,850 a year.
"The market is defined by a mismatch," said Amy Reynolds, head of sales at estate agent Antony Roberts. "Cautiously motivated sellers and cost-conscious buyers with genuine negotiating power. This market needs stability and transactions—and frankly, so does the country."
Earlier this week, Nationwide, which uses a different methodology, reported its first monthly house price decline this year in May.
