Long Read  

House prices – where are we now?

House prices – where are we now?

Since the start of the pandemic, the average UK house price has increased to £270,452 from £217,911 – a rise of 24.1 per cent

This growth has largely been driven by the pandemic-induced 'race for space' as many people have looked for more space (both inside and outside their homes), a change in lifestyle or a relocation to be nearer to family, which has sent prices soaring in the UK’s most popular hotspots. 

But how will increasing interest rates and the cost-of-living crisis impact the market, and what difference will the recently announced changes to mortgage affordability stress testing have? 

At first glance, the latest data from the Nationwide house price index suggest house price growth is still robust.

Annual UK house price growth remained at 10.7 per cent in June.

This marks the eighth month in a row of double-digit price rises, meaning UK house prices have not experienced such consistently strong levels of growth since 2005. 

However, there are signs that buyer demand is beginning to moderate in response to five successive interest rate rises.

On closer inspection, the same index shows that on a monthly basis, prices rose by just 0.3 per cent in June.

That may be the 11th monthly increase in a row but it is also the smallest increase in that period. 

And with the Bank of England warning it may hike the base rate by 0.5 per cent in August, the outlook for the rest of the year looks less positive. 

Basic economics 

In the short term, the market will continue to be driven by the age-old supply and demand dynamic.

Between July 2020 and May 2022, newly agreed sales have consistently been above their pre-pandemic norm (the 2017-19 average for each month). 

Meanwhile, new instructions have consistently remained below the same benchmark.

And so strong levels of activity have eroded what little new supply has come to market.

Consequently, the number of properties available to buy is low, something that should insulate the market from price falls, if not slowing levels of price growth.  

The impact of these simple supply-demand imbalances is already reflected in the geographical pattern of price growth.

In the year to June, the strongest price growth was in the most stock-constrained market, namely the South West of England (14.6 per cent).

Meanwhile, the weakest was in London (5.9 per cent) where stock levels are closest to their pre-pandemic norm.  

How is this changing given the economic backdrop?

June of this year represents the first month since the inception of the mini housing-market boom where agreed sales have fallen below their pre-pandemic norm at a national level.

But they have only been marginally below this watermark.

While this could be early signs of normalisation of activity, it will take some time for available stock levels to get back to normal. 

The Royal Institute of Chartered Surveyors survey can also be a good early indicator of house price movements.