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(Bloomberg) — UK house prices are falling at their fastest annual pace since 2011, Halifax said, as the property market shows signs of strain in the face of rising borrowing costs. 

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The average cost of a home declined 2.6% in June from a year earlier to £285,932 ($364,320), the mortgage lender said in a statement Friday. Prices fell 0.1% last month alone, the third consecutive decline.

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Speculation the Bank of England will have to keep raising interest rates to tame stubbornly high inflation has pushed up the cost of mortgages, with the most common fixed-rate loans now above 6%, a level seen as a pain threshold for consumers already struggling with elevated food and energy costs.

“The resulting squeeze on affordability will inevitably act as a brake on demand, as buyers consider what they can realistically afford to offer,” said Kim Kinnaird, director at Halifax Mortgages.

In a further blow to homeowners, traders are now pricing in the BOE raising interest rates to 6.5% by December, the highest level since 1998. Analysts expect house prices to drop as much as 10% from their peak in the summer of last year.

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A picture of a cooling housing market also emerged last week in data from Nationwide Building Society, whose own house price index showed a 3.5% decline on the year — the most since 2009.

For many, the surge in borrowing costs has yet to hit home. Industry body UK Finance estimates 800,000 fixed-rate loans will need to be refinanced in the second half of this year, and a further 1.6 million in 2024.

Against such a backdrop, Kinnaird said the housing market was displaying a “degree of stability,” with prices down only 2.7% from their peak in August last year and up 1.5% this year, thanks to a more buoyant performance in the first quarter.

Recent losses are also dwarfed by a the huge gains homeowners made during the pandemic, when tax breaks and demand for homes away from urban centers sent prices soaring. 

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Halifax reported that the South of England, which has the most expensive homes, is experiencing the largest declines in house prices.

In London, they fell 2.6% from a year earlier, costing the average homeowner in the capital £15,000 amid the weakest performance since the financial crisis in 2009. In the South East, values dropped 3%, the most since July 2011.

Wales, which saw prices boom during a “race for space” during the pandemic, saw prices fall 1.8%, the first annual decline since March 2013. Scotland had the first drop in prices in three years, albeit a modest 0.1%. Values rose in the West Midlands, Yorkshire and Humberside, and in Northern Ireland.

Mortgage rates shot up in the market turmoil triggered by former Prime Minister Liz Truss’s unfunded spending plans last September. Although that specific impact subsided, BOE rate hikes are now pushing them higher again. 

“How deep or persistent the downturn in house prices will be remains hard to predict,” Kinnaird said. “With markets now forecasting a peak in Bank Rate of over 6%, the likelihood is that mortgage rates will remain higher for longer, and the squeeze on household finances will continue to put downward pressure on house prices over the coming year.”

(Adds historical context)

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