Nationwide Building Society has reported that annual house price growth fell back in May, with a 0.1% month-on-month fall in house prices.

The annual rate of house price growth slipped back to -3.4%, from -2.7% in April.

Robert Gardner, Nationwide’s chief economist, said: “Following tentative signs of improvement in April, annual house price growth softened again in May, falling back to -3.4% (from -2.7% in April). However, this largely reflects base effects with prices broadly flat over the month after taking account of seasonal effects. Average prices remain 4% 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% 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%, well above the c4.5% peak that was priced in around late March. Furthermore, rates are also projected to remain higher for longer.

“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.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, added: “With inflation falling, but not as much as forecast, markets are now pricing base rate to peak at 5.5%. Subsequent volatility in swap rates, which underpin the pricing of fixed-rate mortgages, means the latter are being pulled at short notice and either withdrawn completely or returning at significantly higher rates.

“Borrowers should not panic but seek advice from a whole-of-market broker and book a rate in advance of when they need it if they are worried. If rates fall by the time you come to take out your mortgage, you should be able to opt for a cheaper one.”

Jeremy Leaf, north London estate agent and a former RICS residential chairman, said: “Just as with HMRC’s disappointing but hardly surprising transactions numbers, this respected house price index is also a little historic.

“The figures reflect what was happening not just after the mini-Budget in September when so much activity paused but also the improvements since.

“Continuing worries about the cost of living highlighted in the recent core inflation numbers are compromising confidence and having a knock-on effect on mortgage cost and availability, inevitably leading to a softening of property prices.”