House prices dropped by 3.8% in July compared to a year previously, the Nationwide House Price Index (HPI) has found.

Analysis by the building society found that house prices continued to drop year-on-year, following a decrease in June of 3.5%.

The HPI has also found that house prices dropped 0.2% month-on-month in July, down from an increase of 0.1% in June.

The average house price in the UK, not seasonally adjusted, now stands at £260,828, down from £262,239 in June.

Nationwide’s chief economist, Robert Gardner, said: “Investors’ views about the likely path of UK interest rates have been volatile in recent months, with the projected bank rate peak fluctuating between 5% in mid-May and 6.5% in early July. There has been a slight tempering of expectations in recent weeks but longer-term interest rates, which underpin mortgage pricing, remain elevated.

“As a result, housing affordability remains stretched for those looking to buy a home with a mortgage. For example, a prospective buyer, earning the average wage and looking to buy the typical first-time buyer property with a 20% deposit, would see monthly mortgage payments account for 43% of their take home pay (assuming a 6% mortgage rate). This is up from 32% a year ago and well above the long-run average of 29%. Moreover, deposit requirements continue to present a high hurdle – with a 10% deposit equivalent to 55% of gross annual average income.

“This challenging affordability picture helps to explain why housing market activity has been subdued in recent months. There were 86,000 completed housing transactions in June, 15% below the levels prevailing the same time last year and around 10% below pre-pandemic levels. More timely mortgage approval data showed a slight increase in activity in June, though most of these applications will pre-date the more recent rise in longer term interest rates. Moreover, activity is still c20% below 2019 levels.”

Personal finance analyst at Bestinvest, Alice Haine, added: “Falling prices are to be expected when you consider the affordability challenges facing borrowers who have been grappling with steep rises in mortgage rates over the course of the summer.

“The average two-year fixed mortgage has eased to 6.81% according to Moneyfacts, while five-year deals have dropped to 6.34% - with many hoping borrowing costs have already peaked. With inflation expected to drop again this month as it will take into account July’s retreat in energy prices, the squeeze on household budgets could also be starting to ease.

“That will provide little comfort for first-time buyers and homeowners looking to remortgage soon, who still face a number of challenges. While first-time buyers may relish news of falling property prices, high interest rates mean affordability is still a major hurdle in their journey towards homeownership. For homeowners falling property prices are rarely good news as they may not secure the price they want if they need to sell and could also have issues refinancing if their loan-to-value ratio is less favourable.”

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