A strong labour market and limited housing stock helped to boost UK house price annual growth by double digits in July, despite rising interest rates, high inflation and lower affordability.
UK house prices rose at an annual rate of 11 per cent last month, slightly up from the 10.7 per cent in June, according to the mortgage provider Nationwide.
The increase took the average house price to £271,209, £55,000 more than in February 2020 before the Covid-19 pandemic.
Although the month-on-month price increase slowed from 0.2 per cent to 0.1 per cent, 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.”
Housing stock remains low, with the average number of properties on sale per surveyor at a 40-year low, and both the effect of inflation running at a 40-year high of 9.4 per cent and record low consumer confidence were highlighted by a cooling of mortgage transactions managed by Nationwide.
Total housing market transactions in the three months to May were about 20 per cent below the elevated levels that resulted from the stamp duty holiday, Nationwide reported, but they were still 5 per cent above pre-pandemic levels.
In the same period, transactions involving home mover mortgages slowed more than others, while first-time buyer mortgage completions remained resilient.
This is despite house price growth continuing to outpace earnings by a significant margin, increasing the required deposit. Nationwide data showed that the average house price was seven times greater than typical earnings in the second quarter, the highest ratio recorded since data began in 1983. Together with higher interest rates, higher prices have pushed up mortgage repayments relative to incomes.
With mortgage rates due to rise further and the cost of living crisis set to worsen, 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.
Andrew Wishart, senior property economist at Capital Economics, said the removal of the stress test in mortgage approval from August 1 could lead house price growth to regain momentum, but he warned that 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, adding that he forecast a 5 per cent drop over the next two years.