(June 7): UK house prices posted their first annual decline since 2012, according to the lender Halifax, with the pressure on borrowers increasing after a renewed surge in mortgage rates.

Average prices fell 1% in May from a year ago to £286,532 (RM1.6 million), Halifax said in a statement Wednesday (June 7). The reading follows a string of month-on-month declines last year that were briefly interrupted in the first three months of 2023 and means the cost of a home is now 2.5% below its peak last August.

The Bank of England has delivered the most aggressive series of interest rate hikes since the late 1980s. Households are only just starting to feel the squeeze, with an estimated 1.3 million due to refinance cheap fixed-rate deals this year.

“The brief upturn we saw in the housing market in the first quarter of this year has faded, with the impact of higher interest rates gradually feeding through to household budgets,” said Kim Kinnaird, director at Halifax Mortgages.

Mortgage rates have headed higher in the past few weeks after higher-than-expected inflation prompted investors to bet the central bank will keep hiking rates through this summer.

Rates on the the most popular loans are now above 5%, a level the BOE has identified as a pain threshold for consumers. The average cost of a five-year fixed deal with a 85% loan-to-value jumped to 5.02% this week, up from 4.55% the previous week, according to the property search website Rightmove.

Kinnaird warned that the recent uptick in mortgage rates “will inevitably impact confidence in the housing market as both buyers and sellers adjust their expectations.”

Halifax’s figures reinforce those released by Nationwide Building Society, which said last week that prices resumed their decline in May. Halifax previously has painted a brighter picture of the housing market than Nationwide. The fact that both are now reporting falling prices is a clear sign of the downward pressures on the market.

“The UK housing market is coming back down to earth after a strong three years, not falling off a cliff,” said Tom Bill, head of UK residential research at Knight Frank. “This isn’t the global financial crisis part two for house prices. Any decline will be kept in check by rising wages, low unemployment, cash sales, record-high levels of housing equity, longer mortgages and savings amassed during the pandemic.”

Some economists have warned that property prices could slump by 10% this year, though a lack of supply and a robust labor market is providing some support. Halifax said prices were unchanged in the month of May and fell 0.4% in April.

The biggest year-on-year falls were seen across the south of England and London. Flats suffered the biggest decline in value, falling 1.9% compared to a year ago.

Credit ratings agency Fitch warned on Tuesday that mortgage affordability — the proportion of income spent on monthly home loan payments — will deteriorate to its weakest since 2008 in the UK this year.