House prices flattened off in May after a rise in April. But with mortgage rates now on their way back up we suspect that the stabilisation in prices over the last couple of months will soon give way to renewed falls.
The -0.1% m/m fall in house prices in May followed the first increase in prices, of +0.4% m/m, in eight months, suggesting that house prices continued to stabilise thanks to the partial reversal of the spike in mortgage rates last autumn. Nonetheless, annual house price inflation fell further into negative territory, from -2.7% in April to -3.4% in May, driven by the base effect of a large increase in prices in May a year ago rather than the modest drop in prices in May this year. Overall the Nationwide House Price Index remained 4% below its peak last August, consistent with the average house price falling by around £13,000, from £273,800 to £260,700.
However, the stabilisation in house prices was always fragile given affordability is still very stretched by historical standards. The upward revision in interest rate expectations due to stronger-than-expected inflation in April means that the average mortgage rate will jump from around 4.3% to over 5% imminently and to around 5.7% by early 2024. That is the same level as last autumn which suggests a renewed fall in house prices is likely. We think that prices will eventually drop by a further 8% on top of the 4% decline to date.
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