The UK housing market has recorded its sharpest price drop in nearly a year, as surging borrowing costs linked to the conflict in Iran pressure potential homebuyers.
Nationwide Building Society reported that the average UK house price fell by 0.6% to £278,024 (approximately $374,400). This marks the first decline this year and is significantly steeper than the 0.2% drop economists had forecast.
On an annual basis, prices are still up 1.7%. The market initially proved resilient at the onset of the conflict, supported by robust household balance sheets, but that momentum now appears to be waning.
Wage growth is struggling to keep pace with inflation, while rising mortgage rates are eroding affordability for prospective buyers.
Although mortgage rates have retreated from recent peaks, data from Moneyfacts shows the average two-year fixed-rate mortgage remains elevated at 5.68%. This is nearly 0.9 percentage points higher than the level seen in late February, before the US and Israel launched strikes against Iran.
Other surveys also point to economic stagnation stemming from the conflict. The Royal Institution of Chartered Surveyors has warned that house prices could fall further in the coming months.
Robert Gardner, Nationwide's Chief Economist, stated, "A degree of softening in market momentum was foreseeable, given the uncertainty generated by developments in the Middle East and the associated rise in energy prices and interest rates."
He added, however, that this weakness could be temporary "if the latest shock proves short-lived and energy prices normalize over the coming quarters."
The rise in mortgage rates is partly driven by market expectations that the Bank of England will hike borrowing costs to combat inflationary pressures fueled by the Iran conflict. To date, the Bank of England has not raised rates, and markets have scaled back expectations for multiple hikes this year. Traders now widely anticipate only one rate increase by the end of 2026.
Tom Bill, Head of UK Residential Research at Knight Frank, cautioned that price gains this year "could be minimal." He highlighted that uncertainty surrounding future policies from the Labour government led by Prime Minister Keir Starmer could act as a headwind for the market.
He noted, "As mortgage deals agreed before the Middle East conflict gradually expire, higher borrowing costs will erode consumer spending power this year and exert downward pressure on house prices."
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