House prices fall as mortgage rates jump on Middle East shock

House prices fell 0.6% between April and May, the first monthly drop of 2026, as mortgage rates rose following a surge in oil prices.

House prices fell 0.6% between April and May, the first monthly drop of 2026, as mortgage rates rose following a surge in oil prices. The decline was three times steeper than the 0.2% fall analysts had predicted. It also wiped out the 0.4% gain recorded the previous month, according to the Nationwide house price index.

The average home is now worth £278,024. Annual growth slowed to 1.7% in May, down from 3% in April. Prices have also fallen recently on the Halifax and Office for National Statistics measures.

The squeeze on buyers is showing up in mortgage costs. The typical two-year fixed deal sat at 5.68% on Friday, up from 4.83% at the end of February, according to broker data tracked by Forbes Advisor. A typical buyer now spends 37% of their salary on their mortgage, against 28% before the pandemic, figures from Hamptons show.

A Middle East trigger

The immediate trigger is the conflict in the Middle East. After US strikes on Iranian targets over the weekend of 30 to 31 May, Brent crude jumped 2.8% to around $93 a barrel. US crude rose 3.1% to more than $90. The Strait of Hormuz, which carries roughly 20% of the world's oil and gas, has been disrupted.

But the deeper cause runs back more than a decade. The Bank of England held interest rates near zero for years and created hundreds of billions of pounds out of nothing to buy government bonds. That flood of cheap money pumped up house prices far beyond what wages could support. When the cheap money stopped, the bubble was always going to burst. The Middle East shock is the pin, not the balloon.

The Middle East shock is the pin, not the balloon. Years of cheap money pumped house prices far beyond what wages could support.

The Bank of England has kept its base rate on hold at 3.75%. Traders had bet on rate cuts this year. Those bets have now been ripped up, which is why fixed mortgage deals have jumped. Capital Economics, an independent consultancy funded by its clients, expects the two-year fixed rate at 75% loan-to-value to settle at 5% by year end, up from 4% in February.

Housebuilder shares took a hit on Monday. Bellway fell 1.4%, Persimmon 0.6%, and Berkeley 0.5%. The FTSE 100 dropped 0.2% while the more domestic FTSE 250 rose 0.3%.

Factories are also feeling the impact of higher energy costs. The S&P Global UK manufacturing PMI came in at 53.9 in May, indicating continued expansion. But selling prices rose at the fastest pace since July 2022. Rob Dobson at S&P Global warned much of the activity was firms front-loading orders before further price rises.

No rate cut waiting in the wings

Robert Gardner, chief economist at Nationwide, said the hit so far was 'modest'. He pointed out the economy grew 0.6% in the first quarter and household debt is at its lowest level relative to income for around two decades.

Martin Beck, chief economist at WPI Strategy, said the difference from past shocks is that there is no rate cut waiting in the wings. Brexit and the pandemic were softened by cheaper borrowing. This time, inflation risk is rising, not falling.

Globally, the picture is mixed. South Korean exports hit a record $87.8 billion in May, the strongest annual growth in more than four decades, driven by semiconductors and AI demand. Samsung shares jumped almost 10%.