The UK has recorded its first annual contraction in home costs in additional than 10 years after rising rates of interest piled strain on mortgage debtors, new analysis from Halifax reveals.

The mortgage lender mentioned home costs had been 1%, or £3,000, decrease in May than they had been in the identical month final yr, marking the primary annual decline since 2012.

However, the common worth of a home within the UK remains to be £25,000 greater than it was two years in the past, and £5,000 greater than the extent recorded on the finish of final yr.

The worth of property boomed over the pandemic, when demand was boosted by the stamp obligation tax break and the race for house that adopted the enlargement of working from dwelling.

Average house prices peaked at round £294,000 in August final yr, in line with the month-to-month index by Halifax. They have since fallen to £286,532.

Prices had been broadly unchanged between April and May, following a 0.4% decline within the month to April.

Household incomes have been squeezed by the price of borrowing, which has elevated at its quickest tempo in 26 years over the course of the cost of living crisis. The Bank of England has elevated the bottom rate of interest 12 occasions because the finish of 2021 to its current stage of 4.5%.

Separate figures revealed by UK Finance confirmed that mortgage arrears continued to rise within the first three months of the yr as debtors struggled to maintain up with rising repayments.

Total financial institution deposits fell for the primary time in years as households drew on financial savings constructed up over the course of the coronavirus lockdowns to assist navigate the squeeze on their incomes, the commerce affiliation mentioned.

Household spending was resilient at the beginning of the yr as buyers sought to take advantage of store reductions in January, however their confidence about their private monetary conditions remained weak.

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Andrew Wishart, senior property economist on the Capital Economics consultancy, mentioned: “House prices were unchanged in May according to Halifax. Given that lack of momentum, the increase in mortgage rates following the bad inflation data published on the 24th of the month is set to tip house prices into a renewed leg down.”

Forecasts revealed by the consultancy count on the common quoted mortgage fee to rise from 4.3% in April to five.7% by the top of the yr, with the financial system set to enter a recession, outlined as two consecutive quarters of detrimental development.

House costs will fall by a complete of 12% from peak to trough, in line with Mr Wishart. “The Halifax [house price index] is only down by 3% since its peak in August 2022, so we anticipate a further 9% drop in prices on this measure,” he mentioned.

Cooling demand

Kim Kinnaird, director of Halifax Mortgages, mentioned that the annual decline in home costs displays their energy final yr.

“As expected the brief upturn we saw in the housing market in the first quarter of this year has faded, with the impact of higher interest rates gradually feeding through to household budgets, and in particular those with fixed rate mortgage deals coming to an end,” she mentioned.

“With consumer price inflation remaining stubbornly high, markets are pricing in several more rate rises that would take base rate above 5% for the first time since the start of 2008. Those expectations have led fixed mortgage rates to start rising again across the market.”

Inflation is at 8.7%, down from a 41-year excessive of 11.1% in October final yr, in line with the most recent official figures revealed by the Office for National Statistics.

House costs are anticipated to fall additional, Ms Kinnaird mentioned, including: “This will inevitably impression confidence within the housing market as each consumers and sellers alter their expectations, and newest business figures for each mortgage approvals and accomplished transactions present demand is cooling.”