‘Surprising momentum’ in housing market as prices increase by 11% annually

The housing market retained a surprising degree of momentum in July, despite the mounting pressures on household budgets, according to an index.

Annual UK house price growth accelerated slightly in July to 11.0%, from 10.7% in June, according to Nationwide Building Society, which added that it expects the market to slow in the months ahead.

Prices were up by 0.1% month on month, marking the 12th monthly increase on this measure in a row.

The average house price in July was £271,209.

Robert Gardner, Nationwide’s chief economist, said: “The housing market has retained a surprising degree of momentum given the mounting pressures on household budgets from high inflation, which has already driven consumer confidence to all-time lows.

“While there are tentative signs of a slowdown in activity, with a dip in the number of mortgage approvals for house purchases in June, this has yet to feed through to price growth.

“Demand continues to be supported by strong labour market conditions, where the unemployment rate remains near 50-year lows and with the number of job vacancies close to record highs.

“At the same time, the limited stock of homes on the market has helped keep upward pressure on house prices.

“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.

“Moreover, the Bank of England is widely expected to raise interest rates further, which will also exert a cooling impact on the market if this feeds through to mortgage rates.”

Mr Gardner said transactions among home-movers with a mortgage have slowed more than other sectors.

This probably reflects the recent stamp duty holiday, which ended last year, encouraging home-movers to bring forward purchases at that time, he said.

He continued: “First-time buyer mortgage completions have remained resilient, and are now (around) 5% above pre-pandemic levels, despite growing affordability pressures.

“Indeed, house price growth has continued to outpace earnings by a wide margin, increasing the deposit hurdle, and, together with higher interest rates, has pushed up mortgage repayments relative to incomes.

“The number of cash transactions has remained elevated, though its share of activity has remained broadly stable at (around) 35%.

“This is partly a reflection of an ageing population (where more people own their homes outright).

“However, properties purchased for investment, such as a holiday home or buy-to-let, is also an important element of the cash market.

“Buy-to-let purchases involving a mortgage also remain higher than pre-pandemic levels.

“Sentiment is likely buoyed by the fact that rental demand remains strong, with upward pressure on rents, which may be encouraging landlords to enter the market, particularly if they view property as a hedge against inflation.”

Alice Haine, personal finance analyst at Bestinvest, said that, with a further Bank of England base rate hike expected later this week, “this should have a dampening effect on the market”.

She continued: “Add in the barrage of challenges to come – from the surge in energy prices in October, when the energy watchdog increases the cap on bills, to runaway inflation continuing to outstrip wage growth – and the pressure on household finances will only intensify, potentially placing even more pressure on the property sector.”

Tom Bill, head of UK residential research at Knight Frank, said: “For those wondering how house prices can continue to grow as the cost-of-living squeeze intensifies, the answer is that they are happening for the same reason – a supply chain disruption.”

Nathan Emerson, chief executive of Propertymark, which represents estate and letting agents, said: “The market has been relentless for the past two years. Our member agents are telling us that they are now beginning to see the signs of a return to a normal seasonal trend when the market slows down in the summer months.

“But year-on-year price growth is still high and, despite the rising cost-of-living, all indications are for that to continue for some time yet, while it remains cheap to borrow money and with the number of buyers still outnumbering properties available.”

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, suggested the ongoing surge in mortgage rates will cause buyer demand to cool further.

She said: “The rate for a two-year 75% LTV (loan-to-value) fixed-rate mortgage already has increased to 2.88% in June from 1.57% in December – the fastest six-monthly increase since at least 1995 – and looks set to rise to around 3.1% by the end of the year, if the MPC (Bank of England Monetary Policy Committee) delivers the rate hikes that markets currently expect.”

Iain McKenzie, chief executive of the Guild of Property Professionals, said: “Over the past month the number of buyer inquiries has started to subside, and we are seeing a more balanced sales market that could mean we will see house price growth cool.

“While homeowners have seen the value of their property grow substantially, increasing financial pressure from cost-of-living inflation has many hesitant about upscaling and some potential movers are now deciding to stay put.”