Nationwide House Price Index: The Housing Market is Playing a Slow Game of Catch Up With the Economy

While annual house price growth softened in August, it remained in double digits for the tenth month in a row – at 10.0%.

Prices rose by 0.8% month-on-month, after taking account of seasonal effects – the thirteenth successive monthly increase.

Indeed, in the past two years, the average house price has increased by almost £50,000.

There are signs that the housing market is losing some momentum, with surveyors reporting fewer new buyer enquiries in recent months and the number of mortgage approvals for house purchases falling below pre-pandemic levels.

However, the slowdown to date has been modest, and combined with a shortage of stock on the market, has meant that price growth has remained firm.

We expect the market to slow further as pressure on household budgets intensifies in the coming quarters, with inflation set remain in double digits into next year.

Moreover, the Bank of England is widely expected to continue raising interest rates, which will also exert a cooling impact on the market if this feeds through to mortgage rates, which have already increased noticeably in recent months.

Energy price cap increase will have greatest impact for least energy efficient properties

Ofgem recently announced an 80% increase in the energy price cap, effective from 1 October, which reflects the soaring cost of energy in wholesale markets.

It is important to note that the cap is on the unit price charged to consumers, rather than a maximum bill a household can be charged.

So, while a typical household is set to pay £3,545 a year, for some costs will be even higher.

We’ve looked at the impact of rising energy costs on average bills for properties with different energy efficiency ratings (as reported on energy performance certificates), commented Robert Gardner, Nationwide’s Chief Economist.

Currently (based on the April 2022 price cap), the most energy efficient properties (those rated A-C) pay £1,700 per year, whilst the least efficient (those rated F-G) typically see bills over twice as high at c.£3,900 p.a.

As things stand, from October, average bills for D-rated properties (the most common type) are set to rise by just over £1,250 a year, even after taking account of the government’s £400 discount.

Those in properties rated A-C will see average bills increase by nearly £1,000 a year (or over £80 per month).

E-rated properties will see an increase of over £1,700 per year (c. £150 per month), whilst those in the least energy efficient properties (F/G) face a staggering £2,700 rise (£225 per month).

While only a small proportion of the stock is rated F/G (approximately 2% of those with mortgages), the challenges for these households appear particularly acute.

To provide some further context of the scale of these increases, we’ve calculated the equivalent interest rate rise based on a typical outstanding mortgage.

For ease of comparison, we’ve used the same mortgage balance and term for each EPC rating.

Overall, the average increase is equivalent to a 1.36% rise in interest rates, but around 1% for A to C-rated properties, 2% for an E-rated property and nearly 3% for an F/G-rated property.

Gardener continued, moreover, these increases in energy costs come at a time when mortgage interest rates are also rising.

While most mortgages (c85%) are now on fixed rates, protecting borrowers in the short term, those who are looking to refinance face a significant rise in borrowing costs if mortgage rates stay at current levels.

For example, the average rate on new two-year fixed rate mortgages is currently over two percentage points higher than those prevailing two years ago, while the average rate on five-year fixed rate mortgages is around 1.5 percentage points higher than five years ago.

With household budgets coming under substantial pressure, the government is likely to increase support.

But, as well as addressing the rising cost of energy bills, improving the energy efficiency of the housing stock could play a crucial role.

Incentivising improvement measures, such as loft and cavity wall insulation and solar PV installations, could help limit bill increases and assist the UK towards its carbon emissions targets.

Tom Bill, Head of UK Residential Research at Knight Frank commented:

“The housing market is playing a slow game of catch up with the economy.

As supply continues to build this autumn and mortgage rates rise, demand will soften and annual price growth will fall to single digits, although we don’t expect a cliff-edge moment.

Stewardship of the economy under the new Prime Minister is now the key risk facing the property market.

If unemployment stays low, inflation remains relatively contained and we avoid the Bank of England’s prediction of a recession lasting more than a year, prices should continue to rise modestly.”

Tomer Aboody, director of property lender MT Finance, said:

“With less stock on the market and therefore lower transaction volumes, these price rises are not surprising as buyers have little choice and are therefore outbidding to secure a home.

However, while a few months ago these bids were above asking price, buyers now are more cautious due to rising rates and costs so are bidding around or below asking price, taking into consideration any work required and therefore delays in material and higher building costs.

With energy prices rocketing, an energy-efficient home will be higher up the pecking order on buyer’s wish lists, especially as lenders will be looking to reward borrowers on being more efficient by offering lower rates.”

Jeremy Leaf, north London estate agent and a former RICS residential chairman, comments:

“Although of course a little historic and reflecting only activity of Nationwide’s customers, these figures have proven to be a long-standing, reliable indicator of market health.

At the sharp end, demand is still there, albeit softer than in previous months but continuing lack of stock means prices are likely to be sustained for some time yet.

Rises in the cost of living and interest rates are certainly making a difference but the latter has not filtered through to the figures yet, bearing in mind so many borrowers are on fixed-rate terms.

Looking forward, we don’t expect much change, particularly while new listings and appraisals are at a relatively low level, although the picture may alter as many return from holidays.”

Alex Lyle, director of Richmond estate agency Antony Roberts, says:

“If we see an increase in supply over the coming weeks then we expect a strong autumn market.

There is, however, little doubt that the continuing economic challenges are having an impact, with buyers only seeing interest rates heading one way.

The family house market in particular remained resilient throughout August.

While there was precious little new stock, the high volume of deals agreed and new buyer registrations was reassuring.

We expect buyers to attempt to secure a property as quickly as possible over the coming months, with sellers benefitting from some very committed demand.”

Avinav Nigam, co-founder and chief operating officer of real estate technology platform IMMO, says:

“This slowdown in price growth will be welcomed by those struggling with affordability challenges, as the average house price remains over 10 times average annual individual earnings.

August’s data makes sense.

House prices are the result of supply and demand gap between buyers and sellers, as well as investors and consumers.

In August we see one upward force and one downward force on house pricing that explains the numbers better.

August tends to be the best month in terms of seasonality peak and does 7 per cent better on average than the rest of year due to more purchases and family moves happening which drive prices upwards.

At the same time, interest rate rises and talk of recession are pulling prices downwards.

In recessionary times and times with higher interest rates, demand for buying properties tends to fall.

On the ground, we suspect that actual selling prices are softening a little even if asking prices may not change by much.

Vendors are having to accept a slight adjustment in pricing with deeper discounts than may have been the case just some months ago.

However, we all still need a roof over our heads.

Demand for housing does not fall in absolute terms.

Demand shifts from buying to renting properties, which offers more flexibility.

Unfortunately, the shortage of supply of both properties for ownership and for rent continues.

For this reason, the slowdown in growth should not be taken as an indicator of a major crash to follow.

It just means that there’s a supply demand gap that will shift from buying towards renting.

As a result, rental prices have grown by almost 10 per cent in the last quarter vs year ago, creating the need for quality rental housing at affordable prices.

Professional investors are needed to plug this gap in quality, energy efficient, affordable homes for people and communities across the UK.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, says:

“Housing prices continue to edge upwards, due to lack of stock, although some of the heat has come out of the market with this slowdown in annual price growth.

Borrowers remain keen to secure a fixed-rate mortgage before rates rise higher.

With another potential rate rise on the cards this month, minds are focused on getting deals done before the cost of borrowing rises further still.

With lenders pulling products with little or short notice in order to maintain service levels, there are further pressures on borrowers.”

Rose Lyle, director of private clients at property consultants INHOUS, says:

“As prices continue to rise, there remains strong demand for good family houses with decent gardens in school catchment areas in prime and outer prime London in particular.

Escalating inflationary pressures will inevitably have a negative impact on affordability particularly for the middle and lower end of the housing market.

However, the prime and super prime market are likely to be more resilient as cash-rich buyers look to invest their money into property when other asset classes show weaker performance.

Ninety per cent of our transactions so far this quarter have been cash buyers who appreciate that, with inflation where it is, leaving their money in a bank account does not make sense.”