UK Housing Market Faces Softening Due to Iran War Fallout, Nationwide Reports
The UK's housing market is expected to soften as households contend with rising mortgage and energy costs influenced by the ongoing conflict in Iran, according to Nationwide.
The bank made these remarks while reporting a 0.9% rise in house prices for March, indicating that the market "had regained momentum" during that month.
However, Nationwide highlighted that the surge in energy prices triggered by the Middle East conflict represents a "significant shock to the global economy, clouding the outlook".
Expectations of interest rate increases have led lenders to raise mortgage rates and withdraw hundreds of mortgage products in recent weeks.
Nationwide's data showed that March's price increase brought the average property cost to £277,186. Annual price growth rose to 2.2%, up from 1% in February.
Despite this growth, the building society cautioned that a prolonged conflict in the Middle East could negatively impact the market.
Rising Mortgage Rates Reflect Changing Interest Rate Expectations
Mortgage rates have increased sharply due to a significant shift in expectations regarding future interest rate movements.
Prior to the war, the Bank of England was anticipated to cut rates twice this year. However, the energy price surge has led financial markets to expect rate hikes to counter potential inflation rises.
This shift has prompted lenders to raise mortgage rates accordingly.
The average two-year fixed mortgage rate has climbed from 4.83% at the start of March to 5.84%, according to financial information provider Moneyfacts. Similarly, the average five-year fixed rate increased from 4.95% to 5.76% over the same period, reaching its highest level since September 2023.
Moneyfacts noted that for a typical £250,000 loan over 25 years, nearly £1,800 per year has been added to the average two-year fixed deal since early March, while more than £1,400 has been added to the average five-year deal.
Expert Insights on Housing Affordability and Market Activity
Robert Gardner, Nationwide's chief economist, commented on the potential impact of sustained higher rates:
"If higher rates are sustained, this could reverse some of the improvement in housing affordability that has taken place in recent years."
He added:
"With consumer sentiment also likely to be dented by the uncertain outlook and the prospect of rising energy costs, housing market activity is likely to soften."
Caitlyn Eastell, personal finance analyst at Moneyfacts, observed:
"Many households may have to tighten their budgets in response to these rising costs, and first-time buyers with smaller deposits may be held back from getting on the property ladder."
Gardner further noted that despite potential bill increases, household finances remain robust:
"Household finances are solid, with household debt at its lowest level relative to income for two decades, and significant savings buffers accumulated in recent years."
He expressed hope that these factors would help mitigate additional pressures, while acknowledging ongoing recovery from the previous cost of living crisis:
"Hopefully this will help mitigate the additional pressures, though many are still recovering from the previous cost of living crisis."
Gardner also pointed out that approximately 90% of existing mortgage holders are on fixed-rate deals, meaning they will not experience an immediate impact from higher interest rates.
Market Forecasts and Potential Price Movements
Ashley Webb, UK economist at Capital Economics, expressed skepticism about previous growth forecasts for house prices this year:
"I doubted house prices would meet the previous forecast of 3.5% growth this year."
He elaborated:
"Depending on how far mortgage rates rise and by how much the economy weakens, prices may rise by a more modest 1.0% or so, or even stagnate in an adverse scenario."
Webb concluded:
"But we're not expecting big outright falls in nominal prices."
