British house prices in July rose by 2.1% compared to the previous year, representing the most significant annual increase since December 2022, according to data from the Nationwide Building Society released on Thursday. Despite this uptick, prices are still below the peaks reached earlier that year. The monthly rise in house prices was 0.3%, bringing the average house price to £266,334 ($341,706). These increases slightly exceeded economists’ forecasts from a Reuters poll.
The timing of this data release is notable as it comes shortly before the Bank of England (BoE) is set to announce its August interest rate decision. Many economists anticipate that the BoE will lower interest rates from the 16-year high where they have been for almost a year. The expectation of a rate cut is partly driven by the recent softening tone from Federal Reserve Chair Jerome Powell, which has influenced global financial markets, including those in the UK.
Nationwide’s Chief Economist Robert Gardner noted that while investor expectations of a modest BoE rate cut might help reduce borrowing costs, the overall impact is expected to be limited. This is because swap rates, which underpin fixed-rate mortgage pricing, already factor in anticipated future declines in interest rates. “Investors expect Bank Rate to be lowered modestly … which, if correct, will help to bring down borrowing costs,” Gardner said. “However, the impact is likely to be fairly modest as the swap rates which underpin fixed-rate mortgage pricing already embody expectations that interest rates will decline in the years ahead,” he added.
Despite the recent annual increase, British house prices in July were still 2.8% below the peak reached in the summer of 2022. The housing market experienced a significant surge, with house prices rising by 25% between the start of the COVID-19 pandemic—driven by increased demand for more spacious homes—and September 2022. However, this upward trend was disrupted when a bond market slump under then-Prime Minister Liz Truss led to a temporary shortage in mortgage finance.
Since then, house prices have largely plateaued as the BoE raised and maintained high interest rates to combat a surge in consumer price inflation following the pandemic and Russia’s invasion of Ukraine. The impact of high interest rates has been felt across the market, with Nationwide reporting that the typical monthly mortgage payment now constitutes 37% of take-home pay, compared to 28% just before the pandemic and a long-run average of about 30%.
Looking forward, Gardner suggested that affordability is likely to improve gradually. This improvement is expected to come from a combination of wage growth outpacing house price growth—which is anticipated to remain relatively flat—and some support from modestly lower borrowing costs. “Affordability is likely to improve only gradually through a combination of wage growth outpacing house price growth—with house price growth expected to remain fairly flat—and some support from modestly lower borrowing costs,” Gardner said.
In conclusion, while British house prices have shown a notable annual increase in July, they remain below previous peaks. The housing market’s future trajectory will be influenced by anticipated changes in BoE interest rates and broader economic conditions. Gradual improvements in affordability are expected as wage growth continues and borrowing costs potentially decline.