House prices will likely fall further in the coming months after a closely-watched index reported the biggest drop in 14 years, experts predict.

It comes after Nationwide reported that annual property values declined by 3.8% in July – the sharpish fall since July 2009.

The average home is now worth £260,828 – a fall of 0.2% compared to the previous month but down 4.5% on the peak recorded in August 2022, the building society said on Tuesday.

Nationwide’s chief economist Robert Gardner blamed the high cost of mortgages.

“As a result, housing affordability remains stretched for those looking to buy a home with a mortgage,” he said.

It follows the Bank of England’s decision to raise interest rates 13 times in a row as it tries to bring down inflation. The current rate of 5% is expected to be raised again on Thursday.

To illustrate the pressure on prospective first-time buyers, Nationwide said a person earning an average wage – who has a typical first-time deposit of 20% and a mortgage with a 6% rate – would see 43% of their take-home pay gobbled up by mortgage payments.

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Experts said they expected the trend of falling prices to continue – and even accelerate – in the short term, because many remain reluctant to lock themselves into mortgages with high rates, even as rents soar.

Imogen Pattison, an assistant economist at Capital Economics, said: “The slight fall in house prices in July is the first sign of the surge in mortgage rates since mid-May taking its toll.

“As we expect mortgage rates to remain around their current level for the next 12 months, we expect further falls in house prices over the coming months.”

She added: “House price falls are likely to gather pace over the coming months.”

Gabriella Dickens, a senior economist at Pantheon Macroeconomics, said rising mortgage rates were to blame and “a further drop seems likely”.

She said: “Consumers’ confidence remains well below its long-run average, and expectations that house prices will fall further are well-entrenched.

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“Accordingly, we think that house prices will have to fall by about 8% from their peak before demand and supply come back into balance.”

However, the bigger-than-expected drop in inflation to 7.9% earlier this month has led some to believe that price declines may not be as severe as previously predicted.

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Nicola Schutrups, managing director at Southampton-based broker The Mortgage Hut, said: “Further falls in house prices are likely for the rest of 2023, but if inflation continues to come down and the jobs market remains strong, there’s still a chance for a soft landing.”

Iain McKenzie, CEO of the Guild of Property Professionals, said: “The latest inflation figures show some light at the end of the tunnel, and there is still a good chance that the year will be softer on the industry than was previously forecast.”

Tom Bill, head of UK residential research at Knight Frank, added: “While we expect UK prices to fall by 5% this year, demand should prove more resilient than expected between now and the general election given the cushioning effect of wage growth, high levels of housing equity, lockdown savings, the availability of longer mortgage terms, forbearance from lenders and the popularity of fixed-rate deals in recent years.”

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