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.
It similarly tells us that a net balance of surveyors are reporting falls in new buyer enquiries for the first time since August 2021, indicating weakening buyer demand.
But again, this fall is from a very high level, and new instructions remain flat, suggesting stock will remain low over coming months.
These headlines disguise the fact that different parts of the market are being affected in different ways.
Specifically, there is evidence that activity at the top end of the market remains much stronger than in the mainstream.
In June, agreed sales for property worth £1mn or more across the UK were still 68 per cent higher than their June 2017-19 average.
This part of the market is less reliant on mortgage finance, and higher levels of disposable income means buyers are more insulated against economic pressures.
Of course, any change in sentiment across the wider housing market does have the capacity to feed up into these higher price bands, so it is not entirely immune to pressures on household finances and the increased cost of borrowing that are expected to suppress the amount of debt home buyers are either prepared to take on or able to secure from their mortgage lender.
Mortgage affordability stress testing
On this latter point, and somewhat surprisingly given the circumstances, the BoE has decided to relax its mortgage affordability stress tests.
This should moderate some of the impact of higher interest rates that have made mortgages less affordable in recent months, and will come as welcome news to buyers who have struggled to keep up with significant house price growth over the past two years
In turn, this could open up greater capacity for more house price growth over the medium term.
But it is unlikely to have a huge effect on lending levels as other restrictions still remain, including the limit on lending at high loan-to-income ratios and other rules and guidance regarding responsible lending, which still require affordability assessments.
So where does all of this leave us?
The strong price growth of the past two years, higher interest rates and the cost of living crisis have all contributed to an erosion of buyers' affordability, which we expect to play out over the short to medium term.
This is particularly true in markets where borrowers require a high mortgage relative to their income.
But despite the recent relaxation of mortgage stress tests, there is relatively limited capacity for further price growth from the end of this year.
So we expect total growth in the four years to 2026 to be much more subdued than we have recently been accustomed to, including the potential for modest price falls next year as some of the heat comes out of the housing market.
Regionally, we anticipate the strongest price growth over the next five years to be seen in the North of England and the weakest in the mainstream markets of London.
However, over this period we expect the prime markets to outperform the mainstream market as wealthier buyers are less impacted by the cost of living and interest rate rises.
Nowhere is this more the case than in prime central London, where a long anticipated recovery has been held back by a lack of international demand.
There still remains capacity for this market to recover at a steady pace and to outperform the wider market over the next five years.
Frances McDonald is a residential research analyst at Savills
