UK house values have dropped the most since 2009 as higher interest rates start to bite.

In the year leading up to May, British house values dropped by the most since 2009, and the nation's housing market is now facing further challenges due to a recent increase in borrowing costs, according to mortgage provider Nationwide.

As reported by Nationwide, the average property price dropped 3.4% from May 2017 to May 2018, following an annual decline of 2.7% in April.

Since the beginning of the global financial crisis in 2009, that decline was the largest year over year.

After an annual increase of 0.4% in April, house prices dipped 0.1% in May, according to Nationwide.

Interestingly, as investors priced in additional Bank of England interest rate increases in response to stronger-than-expected inflation data released last week, bond yields rose once again. As a result, some lenders had to limit or restructure their mortgage offers.

Robert Gardner, Nationwide's chief economist, stated that "headwinds to the housing market look set to strengthen in the near term," highlighting the possibility that the increase in borrowing costs and mortgage rates may not lessen

Nevertheless, Gardner said, "in our view a relatively soft landing remains the most likely outcome given the continued strength of the labour market and the relative strength of household balance sheets."

The 4% decline in home prices from their peak in last August was moderate, according to Martin Beck, an economist with the EY Item Club, a forecasting organisation, compared to the 7% increase in home prices during the previous two years.

However, 2.5 million owner-occupiers have yet to see their fixed-rate agreements increase over the course of 2023, and Beck noted that the BoE is expected to continue boosting borrowing costs, which would cause property prices to keep falling.

While Pantheon Macroeconomics predicted a 4% decline in prices, Capital Economics analysts predicted a further 8% decline.

(Sources: investing.com, reuters.com)