UK house prices were 5.3 per cent lower in August, compared to the same month last year, according to Nationwide Building Society.
The average price of a UK home is now £259,153, around £14,600 lower than in August last year.
It was the biggest annual decline since July 2009, largely due to higher interest rates reducing demand from buyers.
Prices fell 0.8 per cent over the month, compared with a 0.3 per cent fall in July, according to the Nationwide's latest House Price Index.
The Nationwide added that the figures were “not surprising” given the successive rises in interest rates by the Bank of England and recent data showing a marked drop-off in the number of mortgage approvals.
“Nevertheless, a relatively soft landing is still achievable, providing broader economic conditions evolve in line with our (and most other forecasters’) expectations,” said Robert Gardner, Nationwide's Chief Economist.
“In particular, unemployment is expected to remain low and the vast majority of existing borrowers should be able to weather the impact of higher borrowing costs, given the high proportion on fixed rates, and where affordability testing should ensure that those needing to refinance can afford the higher payments.”
Cash is king
Despite being considerably below their 2021 highs, cash transactions have been “remarkably resilient, while purchases involving a mortgage have slowed much more sharply”, Mr Gardner added.
Completed house sales involving a mortgage in the first half of 2023 were 33 per cent below pre-pandemic levels in 2019, and first-buyer numbers were around a quarter lower.
Buy-to-let transactions involving mortgages were 30 per cent below pre-pandemic levels, but cash purchases were actually up 2 per cent, the Nationwide said.
“Those emerging from cheap fixed-rate mortgages taken out in 2021 now face significantly higher repayment levels that put stretched disposable household incomes at risk,” said Alice Haine, personal finance analyst at Bestinvest.
“Meanwhile, first-time buyers shopping around for their first mortgage may find that monthly rents are less than the payments on a home loan unless they consider a longer mortgage term, such as 30 or 40 years, to bring repayments down.”
Soft or hard landing?
With a further 0.25 per cent increase in interest rates expected at the Bank of England's meeting later this month, affordability concerns are rising for the 2.5 million fixed-rate mortgage holders who will have to secure new deals by the end of next year.
As such, Imran Khan, co-founder of PropertyLoop, said the Nationwide's prediction of a soft landing seemed “increasingly optimistic, given the slew of headwinds”.
“According to [the property website] Zoopla, we're on track for the lowest number of sales completions since 2012, and this underscores the market's vulnerability.
“This dampening is particularly noticeable in southern England where higher mortgage rates have deterred buyers.
“Vendors now know that realistic pricing is no longer optional but a necessity to close deals.
“The key determinants for house prices over the next 12 months will unquestionably be inflation, interest rates and the overall economic climate.
“The remortgage crunch looms larger by the day and could be the catalyst for forced sales, potentially at scale.”
However, others believe a soft landing for UK house prices is possible, especially if the improvements in rates in the mortgage market continue.
“If inflation continues to moderate in the coming months, the decline in house prices may start to bottom out,” said John Choong, markets analyst at investment comparison website InvestingReviews.
“This is due to the fact that real wages are finally trumping inflation, with spending power and disposable income rebounding swiftly.”