Surging UK house market set to calm?

House prices in the UK over the past year have increased at their fastest rate since 2004, according to the latest index from Nationwide, one of the country's largest mortgage lenders.

couple looking at house picture
But economists are predicting that the soaring demand and limited supply that have been features since the pandemic struck, could now temper amid the global rise on commodity prices and the squeeze on household incomes.

The average price in the year to March rose 14.3% to £265,312, more than £33,000 greater than in March last year with percentage growth recorded in every nation and region in Britain, led by a 15.3% increase in Wales.

House prices on the rise with London showing weakest growth

Price growth was weakest in London but, even here, annual growth was 7.4% in a city where, according to official figures, an apartment costs an average of about £430,000, compared to the £350,000 price tag of a detached house in the East Midlands.

The South West of England remained the region with the highest annual growth rate (14.4%), closely followed by East Anglia. Growth in Northern Ireland stood at 11.1% and at 12% in Scotland.

Robert Gardner, Nationwide’s chief economist, said: “The housing market has retained a surprising amount of momentum given the mounting pressure on household budgets and the steady rise in borrowing costs.

“A combination of robust demand and limited stock of homes on the market has kept upward pressure on prices.”

However, Mr Gardner added that he expected the market to slow over the rest of the year. “The squeeze on household incomes is set to intensify, with inflation expected to rise further, perhaps reaching double digits in the quarters ahead if global energy prices remain high.

"Moreover, assuming that labour market conditions remain strong, the Bank of England is likely to raise interest rates further, which will also exert a drag on the market if this feeds through to mortgage rates."

Has the pandemic caused the rise in housing price?

The figures suggest average prices are now a fifth higher than they were at the onset of the pandemic two years ago, with detached houses increasing by £68,000 primarily as a result of people seeking larger homes to facilitate remote working because of the pandemic, Nationwide reported.

By comparison, apartments have seen the weakest growth, having gone up in price by £24,000, or 14%, since the start of the pandemic.

Tom Bill, head of UK residential research at estate agents Knight Frank, said: “Despite the exceptionally strong growth seen over the last year, a housing market slowdown is in the post.

“The cost of living squeeze and rising mortgage rates will undoubtedly take their toll on demand later this year. As we move beyond Covid and supply builds, this will also mean that house price growth becomes less eyebrow-raising.”

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said that while the housing market had gone from strength to strength over the past year, March "probably marks the peak" for house price growth.

"For starters, mortgage rates look set to rise further in the coming months," she said. "In addition, we expect housing demand to be hit by a sharp drop in households' real disposable incomes."

Jonathan Hopper, CEO of Garrington Property Finders, added: “House hunters are like daffodils – they usually burst into life as the cold winter months recede. But this year’s Spring bounce has been a barnstormer, and the pandemic-inspired Great Relocation is accelerating.

“The best way to understand the speed at which property prices are rising is to put it in salary terms. In March alone, the average UK home rose in value by £5000 – that’s double the average worker’s monthly salary.

“You don’t need to be an economist to know that such a big mismatch between rising house prices and people’s earnings is unsustainable.

“Two factors will prove decisive in the coming months. As the Spring bounce entrenches and more sellers come to market, improving supply will take some of the heat out of price rises.

“Meanwhile the rising cost of living will gradually eat into would-be buyers’ disposable income and may prompt the Bank of England to raise interest rates further. As borrowing becomes more expensive, many buyers will pause for thought when stretching their budget."
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Read more news and views from David Sapsted.

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