House prices in the United Kingdom experienced their first monthly decline this year in May, as rising mortgage rates triggered by the conflict in Iran dampened homebuyer demand. According to data from Nationwide, the average UK home price dropped by 0.6% compared to April, marking a reversal of earlier gains.
Annual Growth Slows
The typical house price reached £278,024 in May, which was 1.7% higher than the same period last year. However, this annual growth rate represents a significant slowdown from the 3% increase recorded in April. The figures highlight a cooling market as borrowing costs continue to climb.
Impact of the Iran War
Robert Gardner, chief economist at Nationwide, attributed the loss of momentum to uncertainty stemming from the Middle East conflict. "A loss of momentum was to be expected given the uncertainty caused by the war in Iran and the subsequent rise in energy prices and market interest rates," he said. Mortgage rates have broadly increased across the market in recent months, with the average two-year fixed rate reaching 5.68% and the average five-year fix at 5.63% by the end of May, according to Moneyfacts.
Tom Bill, a researcher at estate agent Knight Frank, noted that the housing market is slowing at a time when 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 explained.
Savills Revises Forecast
Estate agent Savills has revised its outlook for the UK property market, now predicting a 2% decline in house prices this year, compared to its previous forecast of a 2% rise. The firm stated that the war in the Middle East has "fundamentally changed" its expectations, with rising mortgage rates expected to weigh on prices.
Despite the recent rise in market interest rates, Gardner noted that the impact on affordability has been modest so far. "Swap rates, which underpin fixed-rate mortgage pricing, remain well below the highs reached in 2023 and are broadly in line with levels prevailing in 2024, implying only a partial reversal of earlier gains," he said. "This provides some confidence that, if the latest shock passes relatively quickly and energy prices normalise in the quarters ahead, any near-term softening in the housing market will also prove short-lived."
Broader Economic Concerns
Martin Beck, chief economist at WPI Strategy, warned that the market remains vulnerable even if mortgage rates edge lower. "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," he said.
Last week, Bank of England Governor Andrew Bailey indicated that the central bank is in no rush to raise interest rates while the outcome of the Iran war remains uncertain and UK economic growth remains weak. The Bank's Monetary Policy Committee voted in April to keep the key interest rate unchanged at 3.75%.
