UK house prices dropped for the first time in more than a year in July, as Britain’s largest lender warned of the fallout of higher interest rates and the wider impact of the ongoing cost of living crisis. The average price of a home was £293,221 last month, down 0.1% month on month, the first decrease since June last year, according to the latest report from Halifax. The slight fall weighed on the annual rate of growth, which is down from 12.5% to 11.8%. However, general house prices are still more than £30,000 higher than at the same time in 2021. Russell Galley, the managing director of Halifax, notes: “While we shouldn’t read too much into any single month, especially as the fall is only fractional, a slowdown in annual house price growth has been expected for some time. Leading indicators of the housing market have recently shown a softening of activity, while rising borrowing costs are adding to the squeeze on household budgets.” He added: “Looking ahead, house prices are likely to come under more pressure as those market tailwinds fade further and the headwinds of rising interest rates and increased living costs take a firmer hold. Therefore, a slowing of annual house price inflation still seems the most likely scenario.”

Interest rates

The Bank of England on Thursday hiked interest rates by 50 basis points - its largest single increase since 1995. The sixth consecutive increase takes borrowing costs to 1.75% and marks the first half-point hike since the bank was made independent from the British government in 1997. The Monetary Policy Committee voted by a majority of 8-1 in favour of the historic half-point rise, and cited climbing inflationary pressures in the UK and Europe since its previous meeting in May. The UK’s central bank said it currently anticipates inflation to hit 13.3% in October and to remain at similarly high levels throughout much of next year, before falling back to its 2% target in 2025. This week’s decision by the Bank of England means higher borrowing costs for property owners on variable rate mortgages.