UK house prices drop as high mortgage costs squeeze buyers

House prices in the United Kingdom fell unexpectedly in August, reflecting the strain that high mortgage costs are placing on buyers.

Figures released on Tuesday by Nationwide Building Society showed average prices declined by 0.1 per cent compared with July, surprising economists who had forecast a modest rise. Annual growth slowed to just 2.1 per cent, the weakest pace in more than a year.

The data underline how higher borrowing costs are reshaping the housing market. Robert Gardner, Nationwide’s chief economist, explained: “The relatively subdued pace of house price growth is perhaps understandable, given that affordability remains stretched. An average earner buying a typical first-time home now needs to spend around 35 per cent of their take-home pay on mortgage payments, well above the long-run average of 30 per cent.”

Although the Bank of England has cut its base rate to 4 per cent, down from a peak of 5.5 per cent in 2024, the reduction has not translated into significantly cheaper mortgage products. Many lenders remain cautious about lowering rates while inflation is still elevated. As a result, households refinancing fixed-rate loans are facing steep increases in monthly payments, leaving less disposable income for other spending.

The weak data come at a politically sensitive moment. Chancellor Rachel Reeves is preparing her autumn budget, and there is speculation that property taxes could be revised to raise additional revenue. Some economists warn that rumours of a new “mansion tax” or changes to capital gains rules may already be discouraging buyers at the upper end of the market. Ashley Webb, UK economist at Capital Economics, said: “Speculation over property tax rises in the Budget could further hit buyer sentiment in the coming months.”

For sellers, the picture is mixed. Estate agents report that stock levels have increased, with more properties remaining unsold for longer. The Royal Institution of Chartered Surveyors recently noted that buyer inquiries fell in July and August, suggesting a slowdown in demand. However, structural factors are still supporting prices to some extent. The UK has a persistent shortage of housing, particularly in urban areas, and new construction has slowed due to rising material and labour costs.

Nationwide’s figures also show that, on a quarterly basis, house prices are broadly flat. This follows a brief rebound in the spring that has now given way to stagnation. Analysts believe the housing market will remain subdued for the rest of the year, with only limited relief for buyers unless mortgage rates fall more sharply.