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UK house prices suffered their first annual decline in more than a decade in September as rental costs rose at a record pace, according to official data.
The average price for a property decreased by 0.1 per cent in September compared with the same month last year, down from 0.8 per cent in August, figures from the Office for National Statistics showed on Wednesday. This marked the first year-on-year drop since April 2012.
The fall reflects the effect of high mortgage rates on the market as the Bank of England keeps interest rates high in an attempt to weaken demand and lower inflation to its 2 per cent target.
The contraction was “primarily due to the effects of monetary policy tightening on mortgage rates and economic activity more broadly”, said Jake Finney, economist at the consultancy PwC UK.
“While we do not anticipate any [interest] rate rises soon, the impact has not fully been felt yet by homeowners,” he added.
Private rental prices rose by 6.1 per cent year-on-year in October, up from 5.7 per cent in September, the ONS reported, marking the fastest rate since the data series began in January 2016.
High borrowing costs have weakened demand for new homes as more households struggle to afford mortgage payments. At the same time, appetite for rental properties has risen pushing up rents.
Rising rental costs also reflect landlords passing on higher borrowing costs to tenants and a shortage of rental stock.
Karen Noye, mortgage expert at the wealth management company Quilter, said that interest rates “will stay higher for longer causing the slump in buyer demand to be prolonged”.
The sharp fall in inflation to 4.6 per cent has boosted expectations that the BoE will trim interest rates from June 2024. The market expects rates to remain at a 15-year high of 5.25 per cent until then.
The ONS house price index refers to deals finalised in September that may have been agreed several months before. It has a longer time lag than data sets from mortgage providers such as Halifax and Nationwide.
Unlike the other indices, the ONS includes cash purchases, providing a more comprehensive measure of house prices.
Gabriella Dickens, economist at Pantheon Macroeconomics, said the ONS house price index would come down in 2024 “with the nadir coming early next year”.
House prices decreased by an annual rate of 2.7 per cent in Wales and 0.5 per cent in England, but rose in Scotland in September, according to the ONS. London reported a 1.1 per cent fall year-on-year driven by contractions in cash and detached house purchases.
London registered the fastest rental price growth in England at 6.8 per cent, setting a new record since the data series began in January 2006.
Anna Clare Harper, chief executive of sustainable investment adviser GreenResi, said: “The only way to reverse the trend of rising rents is for policy to encourage more and better supply, and for professional investors to step into the void that is emerging, as traditional private landlords exit in droves.”