Introduction: In a significant shift for the property market, house prices in London have recorded a year-on-year decline for the first time since 2012. The latest findings from Halifax, a leading lender, reveal that the average price of a UK home has dropped by one percent in May compared to the previous year, settling at £286,532. Particularly affected by this downturn are London and the South East, with declines of 1.2 percent and 1.6 percent, respectively.

The Changing Landscape of the Property Market: The property market has experienced a drastic turnaround in the past year. Throughout spring and summer 2022, homeowners reveled in double-digit price increases as eager buyers took advantage of lifted pandemic restrictions, further fueled by historically low mortgage rates. However, the momentum in the market has been stifled by a series of rate hikes by the Bank of England. Since December 2021, the cost of borrowing has risen from 0.1 percent to 4.5 percent, casting a shadow over the property market.

Impact of Rising Interest Rates: The effects of higher interest rates are now being keenly felt by households, particularly those with fixed-rate mortgage deals coming to an end. As a result, the housing market, which experienced a brief upturn in the first quarter of the year, is now cooling off. Halifax has joined other major lenders in repricing its mortgages, raising the rate on a two-year fixed mortgage for a borrower with a 40 percent deposit from 4.54 percent to 5.36 percent.

Kim Kinnaird, director of Halifax mortgages, explained, “With consumer price inflation remaining stubbornly high, markets are pricing in several more rate rises that would take the base rate above five percent for the first time since the start of 2008. Those expectations have led fixed mortgage rates to start rising again across the market.” The resulting adjustments in buyer and seller expectations are expected to impact confidence in the housing market, leading to further downward pressure on house prices.

Analyzing the Numbers: Among various property types, flats experienced the sharpest fall in prices, declining by 1.9 percent. Terraced homes followed with a decline of 1.0 percent, while semi-detached houses saw a more modest decline of 0.5 percent. These figures indicate the varied impact of the changing market conditions across different segments of the housing market.

Expert Opinions: According to Tom Bill, head of UK residential research at agents Knight Frank, it is unlikely that this will be the sole instance of a national house price index falling into negative territory this year. He predicts that mortgage rates will continue to rise alongside persistently high core inflation, leading to an estimated five percent decline in prices throughout the year. However, Bill emphasizes that this downturn should not be regarded as a repetition of the global financial crisis. Several factors, such as rising wages, low unemployment, cash sales, record-high levels of housing equity, longer mortgages, and savings accumulated during the pandemic, will help mitigate the extent of the decline.

Conclusion: London’s property market is experiencing a noteworthy shift, as house prices fall year-on-year for the first time since 2012. The combination of rising interest rates and the end of fixed-rate mortgage deals has affected buyer and seller expectations, resulting in a cooling of demand and downward pressure on house prices. While the decline is expected to continue, experts highlight that the current situation differs from the severe downturn witnessed during the global financial crisis. Factors such as increased wages, favorable employment rates, cash sales, and accumulated savings will act as stabilizing forces, cushioning the impact of the market adjustment.