Nationwide House Price Index: House price growth slows for third month in a row

“The latest Nationwide House Price Index offers further indication that the pace of house price growth is finally slowing following the whirlwind of new records set during the pandemic.

“Annual price growth dropped for the third month in a row in June, but with the figure still in double digits it appears the property market has not hit the doldrums just yet.

“Prices were also up 0.3% in June compared to May, marking the 11^th successive monthly increase, though it was a slightly more modest uplift on the 0.9% seen last month.

"For now, and despite the pandemic, a worsening cost-of-living crunch, five consecutive interest rate rises and the threat of recession, house price activity remains resilient to the gloom sweeping the rest of the economy. But perhaps we are seeing an end to the runaway rises that have become the norm with the sellers’ market past its peak.

“The big question is how long the property market can remain shielded from the cost-of-living crisis battering household expenditure and the wider economy.

“With inflation hitting a fresh 40-year high of 9.1% in May and expectations it will rise to 11% later this year, people’s finances are being stretched to the max as price rises outstrip wage growth.

“Add in a spate of rate rises from the BoE, with the latest increase earlier this month taking the base rate to 1.25% – the highest level since January 2009 – and it's only natural to assume the momentum in the property market will cool in the months ahead.

“There are already signs the market is easing, with mortgage approvals falling to 66,000 in April from 69,500 in March, according to the BoE, net borrowing of mortgage debt dropping to £4.1bn from £6.4bn and evidence that buyer demand is declining amid rising interest rates.

“However, the UK property market has defied expectations countless times over the past couple of years and in the short-term, the resilience in the market may remain, buoyed by the tight labour market, a continued shortage of properties for sale and borrowing costs that are still considered low by historical standards.

“Indeed, property consultancy Knight Frank is still bullish for the months ahead, expecting house price growth of 8% in 2022, just shy of the more than 10% achieved last year, as the housing market takes longer than expected to recover from the distortions in buying behaviour created by the pandemic and Rishi Sunak’s stamp duty holiday.

“Look ahead though and the picture appears less rosy with runaway inflation, rising borrowing costs and the ongoing ramifications of the Russia’s war with Ukraine all set to have a dampening effect on property prices.

“As the cost-of-living crisis tightens its grip on household expenditure, affordability will become a big hurdle for first-time buyers faced with the challenge of raising a deposit and then stretching their income to afford higher than anticipated mortgage payments.

“One factor that may temporarily boost their position is the Bank of England’s decision to scrap the mortgage affordability stress test first introduced in 2014 in the wake of the Global Financial Crisis to reduce loan defaults.

“It means lenders will no longer need to check if applicants can afford mortgage payments at higher interest rates, with the more relaxed lending criteria potentially allowing people able to borrow more.

“This is unlikely to lead to a mortgage free-for-all, as the rule change comes at a time when mortgage rates are on the rise and household budgets are stretched to the max by rising food, fuel and energy prices – factors likely to naturally constrain many people’s ability to afford higher home loan payments.

“The stress test removal might allow some first-time buyers struggling to secure a mortgage, while at the same time having their finances pummelled by high rents, actually get on the property ladder and secure cheaper monthly housing costs in the process.

“The warning for all in this current era of high inflation is to avoid borrowing the maximum possible for your income in a bid to secure your dream home – even if your broker can make it happen.

“While a mortgage repayment might work out cheaper than renting, property owners are liable for all the costs that come with running a home such as its maintenance and upkeep, council tax bills and insurance costs.

“If anything goes wrong with the property, the buck stops with you so make sure you factor in the cost of running a home when taking on a new mortgage so that you do not leave yourself short at a time when every penny counts. A good rule of thumb is to dedicate no more than a third of total household post-tax income to housing costs – whether that’s your mortgage or your rent.”

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