Mortgage rates set to spike as house sales drop

The figure had stood at -2.7 per cent in April but monthly growth in Nationwide's last study stood at 0.4 per cent.

Nationwide's chief economist Robert Gardner warned that mortgage rates could face "renewed upward pressure" as inflation continues to hurt British pockets.

The UK's consumer price index fell from 10.1 per cent in March to 8.7 per cent in April.

Despite the drop, the decrease fell short of expectations and marked a 31-year high for April.

Inflation peaked last October at 11.1 per cent, the highest figure since Britain was crippled by stagflation in 1978.

A persistently high inflation rate could lead the Bank of England to hike interest rates for the thirteenth consecutive time.

Gardner said: “Following tentative signs of improvement in April, annual house price growth softened again in May, falling back to -3.4 per cent (from -2.7 per cent in April).

"However, this largely reflects base effects with prices broadly flat over the month after taking account of seasonal effects.

"Average prices remain four per cent below their August 2022 peak.

“Recent Bank of England data had shown some signs of recovery in housing market activity, although the number of mortgages approved for house purchase in March was still around 20 per cent below pre-pandemic levels.

"Moreover, headwinds to the housing market look set to strengthen in the near term.

"While consumer price inflation did slow in April, it was a much smaller decline than most analysts had expected.

"As a result, investors’ expectations for the future path of Bank Rate increased noticeably in late May, suggesting it could peak at c5.5 per cent, well above the c4.5 percent peak that was priced in around late March.

"Furthermore, rates are also projected to remain higher for longer."

He added: "If maintained, this is likely to exert renewed upward pressure on mortgage rates, which had been trending down after spiking in the wake of the mini-Budget in September last year.

“Nevertheless, in our view a relatively soft landing remains the most likely outcome since labour market conditions remain solid and household balance sheets appear in relatively good shape.

"While activity is likely to remain subdued in the near term, healthy rates of nominal income growth, together with modestly lower house prices, should help to improve housing affordability over time, especially if mortgage rates moderate once Bank Rate peaks."

The Bank of England's anticipated interest rate increase would likely see the figure hit 4.75 per cent.

Such a move would see the rate would hit its highest level since it was raised to five per cent amid the turmoil of the 2008 financial crash.

The base interest rate was as low as 0.1 per cent in late 2020 and early 2021.

The figure steadily rose with increments of 0.25 per cent to 4.5 per cent in May.