For a long time, the real estate market in Great Britain only knew one direction: steadily upwards.

Since the beginning of autumn, however, prices have fallen noticeably for the first time.

This reflects rising interest rates and a deteriorating economic outlook.

In November, average prices fell 1.4 percent from the previous month, said Nationwide, the country's largest building society.

Compared to the end of 2021, residential buildings are still worth 4.4 percent more.

Philip Pickert

Business correspondent based in London.

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The level is high, but a decline is noticeable.

Since the beginning of autumn, the average price for a typical house on the island has fallen from a record £274,000 to £264,000, according to the Nationwide Index.

These are national averages.

In London, a small house costs about twice as much as in other parts of the country.

The property market in the UK has received a lot of public attention because of the high home ownership rate and millions of households who have mortgages to pay off.

Interest rates have risen significantly this year.

The Truss government's failed "mini-budget" in September contributed to an extra rise in interest rates in September, Nationwide's chief economist Robert Gardner confirms.

In the meantime, the risk premiums have receded.

Compared to the summer, homebuyers are now paying significantly higher interest rates.

Nationwide raised the standard mortgage rate again in early December, from 5.74 to 6.49 percent.

The base rate rose from 4.25 to 5 percent.

This increasing burden is causing resentment among the population.

Banks fear loan defaults

In view of the expected fall in prices and the feared recession with higher unemployment, the banks are threatened with more bad loans and defaults.

They have started to build higher risk provisions for potential losses on their balance sheets.

Of the four largest banks, HSBC, Barclays, Natwest Group and Lloyds, HSBC posted the largest provisions at $1.1 billion in the third quarter alone.

Lloyds has also made more than £1bn in loan loss provisions over the three quarters of this year.

Building society Nationwide Building Society increased its provisions for bad loans to £108m in the third quarter after unwinding provisions in 2021.

Natwest boss Alison Rose, whose bank recently had to issue a profit warning, is also accruing, but said she "doesn't yet see any signs of heightened financial distress" among her customers.

However, Natwest is monitoring the situation very closely.

Analyst Kallum Pickering from the Berenberg Bank also sees no signs that the price correction for real estate could lead to a financial crisis like in 2008.

Further rate hikes expected

How far the prices on the real estate market will fall is unclear.

The forecasts differ widely.

Lloyds is forecasting a drop in prices of around 8 percent.

Nationwide CFO Chris Rhodes says the most likely scenario is down 8 to 10 percent.

This would correct the British real estate market significantly.

However, it had increased by more than 20 percent since the beginning of 2020 and also during the Corona years.

With a price correction of 8 percent, it would only give up a third of its profits since 2020, says Gabriella Dickens of the consulting firm Pantheon Macroeconomics.

Andrew Wishart of Capital Economics expects the market to bottom out by 2024 when it is down 12 percent.

Credit Suisse analysts even believe that house prices will fall by up to 15 percent.

The extent to which prices correct depends heavily on the rise in interest rates.

The Bank of England has raised interest rates from 0.1% to 3% since the end of 2021 to combat inflation, which has recently risen to just over 11% in the UK.

The last interest rate hike took place at the beginning of October, when the central bankers raised the key interest rate by 0.75 points.

The next meeting of the Bank of England is scheduled for December 15th.

In general, the market is now expecting a further increase of half a percentage point.

According to a Reuters survey, interest rate hikes are expected to peak at 4.25 percent in the first quarter of 2023.

That would be less than what was expected just a few weeks ago - and thus good news for homeowners and mortgagors.