U.K. house prices fell 0.6% in October, the Lloyds House Price Index showed on Friday, dragging the annual change to minus 1.2% and leaving the average home at £296,285. It was the steepest year-on-year decline since October 2023, and the price drop was concentrated in London and southern England.

The figures land at an awkward moment for property owners and lenders. The Bank of England raised its benchmark rate by a quarter point to 4% on Nov. 5, its first increase in more than three years, and the housing data arrived the next morning. For investors in Hong Kong, Singapore and elsewhere in Asia who hold London homes, or who track British bank stocks, the release offers the clearest sign yet that higher borrowing costs are feeding through to prices.

Lloyds index misses forecasts as prices slip for a second month

The October fall followed a 0.1% decline in September, and prices were down 0.5% over the latest three months, Lloyds said. The average price slipped from £298,167 in September, a drop of £1,882, according to ITV News.

The result was well below expectations. Economists had forecast a 0.1% monthly rise and an annual dip of only 0.3%, AJ Bell reported, citing a consensus compiled by FXStreet.

The series was formerly known as the Halifax House Price Index; Lloyds Banking Group now publishes it under the Lloyds name, according to the notes to the release.

Andrew Asaam, mortgages director at Lloyds, said housing demand was being tested by a difficult economic backdrop. He tied the weakness to renewed inflation, partly linked to the conflict in the Middle East, which he said was keeping borrowing costs high and squeezing household budgets. He added that prices had moved little over the past couple of years as the market adjusted to higher interest rates, so some adjustment was not surprising.

Lloyds does not expect a long slide. Asaam said conditions were likely to stay subdued in the near term, but that wages rising faster than house prices should gradually improve affordability.

Mortgage demand was already cooling before the rate move. Bank of England data cited in the release showed 53,443 mortgage approvals for house purchases in September, down 2.5% from August and 19.4% from a year earlier.

London and the south lead the decline

The split across the country was sharp. Greater London recorded the biggest annual fall of any region, down 3.1% to an average of £524,892. The South East and South West each fell 2.4%, and Eastern England dropped 2.3%, according to regional figures reported by ITV News.

Prices kept rising further north and in the devolved nations. Northern Ireland led with a 4.4% annual gain, although that was down from 6.9% a month earlier. Scotland rose 2.8%, the North West 2.2%, the North East 2.0% and Wales 1.6%. The West Midlands edged up 0.3%.

Jonathan Hopper, chief executive of Garrington Property Finders, told Mortgage Solutions that "Southern England is in sharp correction territory now." Tanya Elmaz, director of sales at lender Together, described a "distinct lack of momentum" in the market and said high mortgage rates were starting to bite.

For overseas owners of London flats, the regional gap matters more than the national average. A 3.1% annual fall in London, before currency moves, cuts into returns that have been thin for several years.

Rate rise adds pressure on borrowers

The Bank of England's move feeds most directly into variable and tracker mortgages. UK Finance estimated the increase would add an average of £30.72 a month for homeowners on tracker deals, ITV News reported. About 87% of outstanding homeowner mortgages are on fixed rates, which delays the effect for most households, but about 2.3 million fixed-rate deals are due to expire in 2027, according to the same report.

Nathan Emerson, chief executive of Propertymark, said the rate rise "will continue to weigh on consumer confidence," ITV News reported. David Hollingworth, associate director at L&C Mortgages, said subdued price growth looked set to persist in coming months, while noting that first-time buyers may face less competition and more room to negotiate.

Mark Harris, chief executive of SPF Private Clients, said the rate rise "may focus the minds of those remortgaging," according to ITV News, and pointed borrowers to shorter fixes and longer mortgage terms to manage payments.

Official U.K. labour market figures due on Nov. 17 will show whether wage growth is still running ahead of house prices, the affordability argument at the center of the bank's view that the decline will not last.