UK house prices declined for the first time in a year in July as rising interest rates and soaring inflation finally took a toll, with the slowdown forecast to deepen in coming months.

Prices fell 0.1 per cent, the first drop since June 2021, leaving the average cost of a home at £293,221 (€347,412), Halifax said Friday. Values were still 11.8 per cent higher than a year earlier, but the pace of increase is fading.

The slowdown is expected to mark the start of a material loss of momentum for the housing market, which boomed in the pandemic. Households across the income spectrum are now facing a brutal cost-of-living squeeze, with inflation set to hit more than 13 per cent in the autumn, and the strain is being made worse by sharply rising borrowing costs.

Homeowners received a further blow on Thursday when the Bank of England delivered its biggest interest-rate increase for 27 years and warned of a looming recession.

Property portal Rightmove estimated that the 50-basis-point increase will take monthly mortgage payments for first-time buyers to 40 per cent of their incomes, a level not seen since 2012.

“Negligible monthly declines in house price growth will get steeper,” said Tom Bill, head of UK residential research at Knight Frank, a real-estate agent.

“Mortgages have become noticeably more expensive in recent months, which will dampen demand as cheaper offers made earlier this year expire and people roll off fixed-rate deals.”

The hit to living standards is taking hold at a time when affordability for first-time buyers is more stretched than ever. A picture of a slowing market was also evident in recent figures from mortgage lender Nationwide Building Society, which showed prices barely rose last month.

Higher borrowing costs are already having an impact, with Bank of England figures showing mortgage approvals – an indicator of future activity – fell further below their pre-pandemic levels in June.

Still, the market is still generally seen to be stalling, not slumping, with prices being supported by a shortage of homes for sale and savings built up during lockdowns.

“Some of the drivers of the buoyant market we’ve seen over recent years – such as extra funds saved during the pandemic, fundamental changes in how people use their homes, and investment demand – still remain evident, said Russell Galley, managing director at Halifax.

“The extremely short supply of homes for sale is also a significant long-term challenge but serves to underpin high property prices.” – Bloomberg