The average price of a UK home climbed again in August, although the rate of annual growth slowed, as the country’s largest lender warned of a “more challenging period” ahead for house prices amid rising interest rates and the cost of living squeeze.
The average price of a home was £294,260 in August, 0.4% higher than the previous month, and marked another record high, according to Halifax.
It called the monthly rise “relatively modest” compared with the rapid house price inflation that has been seen in recent times, where the average monthly increase in house prices has been 0.9%.
The August increase marked a return to growth for house prices, after they fell in July for the first time in more than a year. The annual rate of house price growth dropped slightly, to 11.5% from 11.8% in July – the lowest level in three months.
The country’s biggest housebuilder, Barratt Developments, provided further evidence on Wednesday of a slowdown in the housing market, saying the number of homes reserved each week until the end of August had fallen below the level of a year earlier, and was now lower than before the coronavirus pandemic.
Releasing its annual results to investors, Barratt said this was related to limited supply of homes, combined with “heightened macroeconomic uncertainty”, adding that it expects house price growth to moderate.
Despite the gloomier outlook, the builder celebrated bumper earnings from the recent housing market boom, reporting pre-tax profits above £1bn for the first time.
It came a day after the London-focused developer Berkeley signalled it was adapting its behaviour to deal with worsening economic conditions, saying it would hold back in buying more land, only doing so “very selectively”.
The Bank of England announced its biggest increase in interest rates in 27 years in early August, taking the UK base rate to 1.75% – a 13-year high – in an attempt to rein in inflation as gas prices drive up UK energy bills. The central bank’s monetary policy committee will next reassess interest rates in mid-September, and it is expected to continue raising rates into next year.
“House prices have so far proved to be resilient in the face of growing economic uncertainty,” said Kim Kinnaird, the director of Halifax mortgages.
However, she added: “Industry surveys point towards cooling expectations across the majority of UK regions, as buyer demand eases, and other forward-looking indicators also imply a likely slowdown in market activity.”
The rises in the energy price cap in October and beyond are expected to increase pressure on household finances, Halifax said, which will also limit the amount that prospective housebuyers can afford to borrow.
“With house price to income affordability ratios already historically high, a more challenging period for house prices should be expected,” Kinnaird said.
The housing market only looked “rosy” at the moment because it was largely being viewed through “the rear-view mirror”, according to Sarah Coles, a senior personal finance analyst at the investment firm Hargreaves Lansdown.
The deterioration in the economic picture over the summer, and growing fears about the impact of sky-high energy bills, were likely to make housebuyers more cautious, she said.
“Now the cost of living crisis has hit home, and while we may not be forced to face the full impact of rises in energy prices, we’re still having to cope with rampant inflation across the board. At a time of rising rates and higher house prices, this is going to push property out of reach for desperate buyers,” Coles added.
Despite these warnings, few analysts expect house prices to tumble any time soon, and they may even get some support from a squeeze on the supply of new properties on the market.
Rising inflation is putting pressure on building firms, which reported on Tuesday that the prospect of recession is leading their customers to put some projects on hold, forcing them to halt hiring and the purchase of raw materials.