House price growth slows as rising inflation and borrowing costs take their toll

  • Annual UK house price growth slowed to 10.0% in August, from 11.0% in July
  • Prices up 0.8% month-on-month after taking account of seasonal effects
  • Average house price rises by almost £50,000 in two years

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Published: 01 Sept 2022 Updated: 01 Sept 2022

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, commented:      

“Britain’s housing market is starting to succumb to the wider economic gloom affecting the country, according to the latest Nationwide House Price Index. The dip in annual house price growth to 10% in August from 11% in July was only to be expected when inflation is running at a 40-year high, borrowing costs are on the rise and energy bills are set to ramp up 80% from October with further increases to come next year. 

“However, prices were still up 0.8% on the month – the 13th consecutive monthly rise - as the market resisted the effects of the cost-of-living crunch. Despite buyer affordability being compromised by rising interest rates and some economists tipping inflation to double to 22% in January,  prices are holding up to some extent - perhaps a reflection of buyers striving to get purchases across the line before interest rates rise any further. However, that is likely to change in the coming months.

“With interest rates already sitting at 1.75% following six rate rises from the pandemic-by era low of 0.10% in December last year, borrowing is certainly becoming less affordable for buyers at a time when real wages are falling because salary increases cannot keep pace with inflation.  

“The Bank of England is likely to raise the base rate again at its next meeting later this month, potentially by a further 0.5%, putting dreams of home ownership further out of reach for some as it strives to stem runaway inflation. 

“In another sign of the slowdown to come, mortgage borrowing dropped slightly to £5.1bn in July from £5.3bn in June, according to the Bank of England, as buyers start to reconsider whether now is the best time to buy. 

“Interestingly, mortgage approvals still rose slightly in July to 63,800 from 63,200 in June – an indication that the market is in a state of flux as homebuyers respond to the rapidly changing economic climate. While some are scrambling to get mortgage deals secured before rates rise any further, others are abandoning their buying plans altogether in the hope that prices will drop sooner rather than later. 

“The crunch point will come when buyers that have bought in the last couple of years have to remortgage. Given the sudden uplift in interest rates, the rise in borrowing costs may be too much to take for those whose budgets have already been wrung dry by the great financial squeeze. 

“With the average two-year fixed deal hitting 4.2% this week*, now is the time to lock in a new deal while it is still relatively affordable – particularly as some lenders allow you to fix a rate up to six months before it expires. The financial markets are expecting interest rates to more than double by next May to 4%, so the situation could be very different in just a few months' time. 

"If your deal does not expire until next year, one strategy might be to overpay on your mortgage now, if you can afford to, to help reduce the financial hit when the product comes to an end. 

“These are already worrying times for households across the country as they brace themselves for the heavy blow from rising energy prices coming next month. When you add in the all the other cost-of-living pressures – from surging food prices to negative wage growth - household budgets are going to be tested to the max with more people turning to credit to make ends meet. 

“With a potential recession looming, the tipping point for the property market will come if people start losing their jobs and cannot keep up with mortgage payments forcing them to sell their homes at a price lower than they’d like in a bid to secure a quick deal.” 

* Source: Moneyfacts 

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