UK Property Market Shows Resilience Amidst Rising Interest Rates and Inflation

Despite a slight dip in the average UK house price in June, the property market in the United Kingdom continues to demonstrate resilience, defying expectations in the face of higher interest rates and elevated inflation. According to the Halifax, the decline in house prices reflects the impact of historically high prices in the previous year, while highlighting the stability observed amidst economic uncertainties. However, concerns about inflation and rising borrowing costs have led to increased mortgage rates, affecting affordability and potentially dampening demand.

The average UK house price experienced a third consecutive monthly fall in June, with a decrease of approximately £300 compared to May, resulting in a typical property costing £285,932.

The Halifax attributes this annual decline to the impact of high house prices observed last summer, when annual growth reached its peak at 12.5% in June 2022. This surge was supported by the temporary Stamp Duty cut. Kim Kinnaird, director of Halifax Mortgages, emphasizes that the annual growth figure masks the market fluctuations experienced over the past year. Average house prices have actually risen by 1.5% or £4,000 in 2023 so far, with most of this growth occurring in the first quarter. This recovery followed a sharp decline in prices towards the end of the previous year, triggered by the aftermath of the mini-budget.

Kinnaird notes that the recent figures indicate a degree of stability despite prevailing economic uncertainty. Mortgage applications remained robust throughout June, particularly from first-time buyers. However, she highlights the sensitivity of the housing market to changes in borrowing costs. The concerns surrounding inflation have led to a significant increase in funding costs, further compounded by a 0.5% rise in the base rate. As a result, mortgage rates have experienced a noticeable surge over the past month.

The resulting affordability squeeze is expected to temper buyer demand as individuals assess what they can realistically afford to offer. While there is typically a delay before the full impact of interest rate increases is felt, existing mortgage holders on variable deals or coming off fixed rates may face higher costs in the coming year. The depth and persistence of the downturn in house prices remain uncertain. Although consumer price inflation is anticipated to decline in the near term, core inflation has proven stickier than initially expected.

Market forecasts now indicate a potential peak in the Bank Rate at over 6.0%. Consequently, mortgage rates are likely to remain elevated for an extended period, exerting downward pressure on house prices throughout the upcoming year. The continuing squeeze on household finances is expected to contribute to the overall price decline.