UK house prices have fallen for the first time in two years in a dramatic reversal of the post-Covid boom.

Prices fell by 1.4% month on month in November – the biggest drop since June 2020, according to Nationwide.

Meanwhile annual growth slowed from 7.2% in October to 4.4% in in November, taking the price of the average UK home to £263,788 – down from £268,282 in October.

Nationwide’s Chief Economist Robert Gardner attributes the price drop to fallout from the mini-Budget on 23 September.

“While financial market conditions have stabilised, interest rates for new mortgages remain elevated and the market has lost a significant degree of momentum,” he said.

“Housing affordability for potential buyers and home movers has become much more stretched at a time when household finances are already under pressure from high inflation.”

Market set to remain subdued

Gardner believes the market looks set to remain subdued in the coming quarters. “Inflation is set to remain high for some time and the Bank Rate is likely to rise further as the Bank of England seeks to ensure demand in the economy slows to relieve domestic price pressures,” he said.

The Nationwide survey also examined the affordability factor, which it says was becoming stretched even before the recent increases in mortgage rates – though with considerable regional variation.

To explore how this is affecting potential buyers, the building society used regional income data to calculate where a prospective purchaser would sit if they were purchasing a typical first-time buyer property in each region, with a 20% deposit and borrowing four times their income.

If the typical buyer comes from a higher income distribution bracket, it suggests affordability is more stretched, with more people priced out of the market.

The survey measured this factor using percentiles – effectively ‘salami slicing’ the total salary range into 100 segments, with the first percentile being the lowest income bracket, and the 100th the highest.

Perhaps unsurprisingly, the picture that emerges is that the typical UK buyer is located higher up the income spectrum the further south you go.

In Scotland and the North of England, the typical buyer would be in the 30th income percentile, while in the South-West they would be in the 80th percentile. In London and the South-East they would be above the 90th percentile.

Regional variations in affordability

The survey shows that some regions have seen a more pronounced deterioration in affordability in recent years than others. In Scotland and the North, the typical buyer is now located in the 30th percentile, compared with the 25th percentile in 2019 before the pandemic struck.

Similarly, in East Anglia, East Midlands and West Midlands, the typical buyer has moved from the 60th percentile to the 70th percentile.

The biggest deterioration in affordability since 2019 has been in Wales, with the typical buyer now located in the 60th income percentile, compared with the 40th percentile in 2019.

Conditions remain most stretched in the capital – in 2019 the typical London buyer was already located above the 90th income percentile. The surrounding South-East has now joined it, with the typical buyer moving up from the 80th income percentile in 2019.

Looking to the future of the property market, Gardner thinks the outlook remains uncertain, with much depending on how the broader economy performs – but he believes a “relatively soft landing” is still possible.

“Longer term borrowing costs have fallen back in recent weeks and may moderate further, especially if investors continue to revise down their expectations for the future path of the Bank Rate,” he said.

“Given the weak growth outlook, labour market conditions are likely to soften, but they are starting from a robust position with unemployment still near 50-year lows.”

He added: “Household balance sheets remain in good shape with significant protection from higher borrowing costs, at least for a period, with around 85% of mortgage balances on fixed interest rates. Stretched housing affordability is also a reflection of underlying supply constraints, which should provide some support for prices.”