House prices rose at 11% annual rate despite the cost of living crisis
According to the mortgage provider Nationwide, UK house prices rose at an annual rate of 11% last month, slightly up from the 10.7% in June. Let’s see why and what is likely to follow.
The UK house price annual growth was boosted by double digits in July, despite rising interest rates, high inflation and lower affordability. A strong labour market and limited housing stock helped in that direction.
According to the mortgage provider Nationwide, UK house prices rose at an annual rate of 11% last month, slightly up from the 10.7% in June.
The increase took the average house price to £271,209, £55,000 more than in February 2020 before the Covid-19 pandemic.
The month-on-month price increase slowed from 0.2% to 0.1%, but July marked the 12th consecutive monthly rise, keeping annual price growth in double digits for the ninth month in a row.
“Demand continues to be supported by strong labour market conditions,” said Robert Gardner, Nationwide’s chief economist. “At the same time, the limited stock of homes on the market has helped keep upward pressure on house price.”
The housing stock remains low. The average number of properties on sale per surveyor is at a 40-year low. Both the effect of inflation running at a 40-year high of 9.4% and record low consumer confidence were highlighted by a cooling of mortgage transactions managed by Nationwide.
The total housing market transactions in the three months to May were about 20% below the elevated levels that resulted from the stamp duty holiday, Nationwide reported, but they were still 5% above pre-pandemic levels.
Transactions involving home mover mortgages slowed more than others, in the same period, while first-time buyer mortgage completions remained resilient.
This is happening despite house price growth continuing to outpace earnings by a significant margin, increasing the required deposit.
The average house price was seven times greater than typical earnings in the second quarter – the highest ratio recorded since data began in 1983 – according to Nationwide data. Higher prices together with higher interest rates, have pushed up mortgage repayments relative to incomes.
It seems certain that mortgage rates will rise further and the cost-of-living crisis is set to worsen. Therefore, experts said, they expected the housing market to cool in the coming months.
“We continue to expect the market to slow as pressure on household budgets intensifies in the coming quarters, with inflation set to reach double digits towards the end of the year,” said Gardner.
Consultancy Oxford Economics forecast that house prices would start contracting on an annual basis from the middle of next year and continue to fall throughout 2024.
According to Andrew Wishart, senior property economist at Capital Economics, the removal of the stress test in mortgage approval from August 1 could cause house price growth to regain momentum, but it would be short lived.
“While limited stock has supported pricing so far, we think that it is just a matter of time before deteriorating demand causes house prices to fall,” said Wishart. He forecast a 5% drop over the next two years.
