UK house prices fell unexpectedly in May as rising mortgage rates squeezed buyers, adding fresh strain to a housing market already struggling with affordability and weakening confidence.
Average house prices fell by 0.6% during the month to £278,024, according to Nationwide, marking the first monthly decline in its index this year. Annual growth also slowed sharply, falling to 1.7% from 3% in April as higher borrowing costs began to weigh more heavily on activity across the market.
The slowdown comes as financial markets continue to react to the economic consequences of the Iran conflict. Rising energy prices have reignited inflation concerns, pushing investors to demand higher returns for lending money. That has driven up market interest rates and increased the cost of fixed-rate mortgages for households.
For many buyers, the shift is arriving at an uncomfortable time. The housing market entered the year on firmer footing, but the latest figures suggest affordability remains a major obstacle. Mortgage costs have risen significantly in recent months, reducing the amount many households can borrow and forcing others to rethink plans to move.
The average two-year fixed mortgage rate has climbed from 4.83% at the start of March to 5.68%, according to Moneyfacts figures reported by the Financial Times. While that increase may appear modest at first glance, it can add hundreds of pounds to monthly repayments on larger loans, placing further strain on household finances.
Robert Gardner, Nationwide’s chief economist, said the loss of momentum was not unexpected given the uncertainty created by developments in the Middle East and the resulting rise in energy prices and interest rates. He noted that affordability challenges remain less severe than during the peak mortgage turmoil of 2023 because market rates remain below previous highs.
Even so, buyers are becoming more cautious. Some are delaying purchases altogether, while others are reducing budgets or extending mortgage terms to keep monthly repayments manageable. The result is a market where activity is slowing despite prices beginning to soften.
The Nationwide figures are not an outlier. Halifax and official Office for National Statistics data have also shown signs of weakening house prices in recent months, suggesting the slowdown is becoming more widespread rather than being limited to a single measure.
The challenge facing many households is that falling prices do not necessarily improve affordability. Lower house prices can be quickly offset by higher borrowing costs, leaving monthly repayments little changed or even higher than before.
That dynamic matters beyond the housing market itself. Home purchases often trigger spending on renovations, furniture, appliances and moving services. When fewer people buy and sell homes, that spending can slow as well, affecting businesses that depend on housing activity.
For existing homeowners, another source of difficulty may still lie ahead. Millions remain on fixed-rate deals negotiated when borrowing costs were lower. As those deals expire, more households will face refinancing at significantly higher rates, increasing the burden on monthly budgets.
The key question now is whether mortgage costs settle back down or remain elevated through the summer. If energy prices ease and inflation concerns fade, borrowing costs could stabilise. If not, housing demand may remain subdued for longer than many expected at the start of the year.
For many households, the problem is simple. Borrowing remains expensive, budgets remain stretched and the hoped-for relief from lower inflation has yet to fully reach the housing market. Until financing becomes more affordable, the housing market is likely to remain a reflection of the financial caution spreading across much of the wider economy.
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