Mortgage costs hold back house prices

House prices rose at their fastest pace since 2007 to reach a record high last month, according to research by Britain’s biggest mortgage lender.

House prices continued to rise in July, but growth is slowing as increasing mortgage costs take a toll on demand.

The average price of a home was 11 per cent higher last month than it was a year earlier at £271,209. However, the monthly rise from June was only 0.1 per cent, down from 0.2 per cent in May and 0.9 per cent in April. It is the smallest monthly rise in 12 months.

Lawrence Bowles, director of research at Savills, the estate agent, said the rise in prices is partly due to slow demand in July 2021 rather than strength in sales this year. “In July last year the market took a brief breather after buyers sprinted to complete before the full stamp duty holiday ended in June,” he said. “Prices fell by 0.3 per cent between June and July last year.”

Interest rates have risen from a record low of 0.1 per cent in December to 1.25 per cent, which is their highest level in 13 years. Another rate rise of at least 0.25 percentage points is expected to push up the cost of borrowing further on Thursday.

However, the impact of interest rate rises on demand may be limited in the short term because 80 per cent of mortgages are on fixed rates and are not immediately susceptible to changes.

The worst of the impact of the cost of living crisis, which has seen inflation rise to a 40-year high of 9.4 per cent, is being felt by poorer households who are more likely to rent than buy.

These factors are offering the housing market “protection” from some wider economic challenges, according to Martin Beck, chief economic adviser to the EY Item Club, who said that homeowners would have time to adjust to higher interest rates and that the low rate of unemployment would reduce the risk of them being forced to sell their homes as they were less likely to be struggling to keep up repayments.

“Recent rises in house prices will ensure many households on fixed-rate loans can meet their current loan-to-value requirements and re-fix their mortgages in time, rather than having to move on to more expensive variable rate loan,” he said. “In the longer term, pressure on the housing market is increasing and affordability is looking increasingly stretched. As a result, it’s hard to see how house price rises will avoid anything but a significant slowdown – but this would be a slowdown, not a contraction.”

The number of new mortgages approved by lenders has fallen steadily since January. But Bowles said that the Bank of England’s decision to scrap a key mortgage affordability test could support growth in house prices in the long run. “We’re predicting these rate rises mean that house price growth will slow to 7.5 per cent by the end of the year. Negative pressure on prices will continue into 2023 … We’ve raised our five-year price forecast from 12.9 per cent to 17.4 per cent, despite the headwinds faced by the UK economy.”