UK house prices saw an unexpected decline in August, signaling that affordability challenges persist even after the Bank of England reduced borrowing costs, according to data
from one of the nation’s leading mortgage lenders.
The Nationwide Building Society reported a 0.2% drop in its house price index, marking the first decline since April. This was contrary to economists' expectations, who had predicted a 0.2% rise according to a Bloomberg survey.
These figures indicate that the housing market's recovery remains uneven following last year’s downturn. Despite the BOE’s first rate cut since the pandemic on August 1 and improving living standards, many first-time buyers continue to struggle with the affordability of homes, as house prices have long outpaced wage growth.
Mortgage rates, while lower than earlier in the year, remain three times higher than in 2021. The BOE’s cautious stance on further rate cuts—markets are currently pricing in just one more reduction this year—means that the cost of borrowing is still relatively high. However, an increase in housing supply is giving price-sensitive buyers more leverage in negotiations.
The average home price in August was £265,375 ($349,490), representing a 2.4% year-on-year increase—the fastest annual growth rate since December 2022. Nevertheless, prices are still 3% below their peak in the summer of 2022.
“Although house price growth and market activity remain subdued compared to historical levels, the housing market is showing resilience in the context of higher interest rates and elevated house prices relative to earnings,” said Robert Gardner, Nationwide's chief economist.
Gardner added, “If the economy continues to recover as we anticipate, housing market activity is likely to gradually improve as affordability constraints ease, driven by modestly lower interest rates and wages growing faster than house prices.”
Surveys suggest that the overall outlook for the housing market this year remains positive—a surprising development considering the dire predictions at the end of 2023, when soaring borrowing costs exacerbated the cost-of-living crisis and pushed the economy into recession.
There are signs that buyers are becoming more confident in their financial situations. Wages are currently outpacing inflation, economic growth has been stronger than expected, and the BOE has hinted at further rate cuts. While policymakers are expected to hold rates at 5% in their next meeting, the market is betting on another cut in November and possibly another by year’s end.
Mortgage costs have been on a downward trend since June, in anticipation of the BOE’s rate cuts. According to Moneyfacts, the average rate on a two-year fixed mortgage is now 5.58%, down from around 6% earlier in the summer.
Tom Bill, head of UK residential research at Knight Frank, noted, “With financial markets anticipating another rate cut this year, and mortgage rates declining this autumn, we expect this to support transactions and modest single-digit price growth.”
In other recent reports, Rightmove Plc noted an uptick in property searches by buyers, partly driven by the political stability following Keir Starmer’s Labour Party’s landslide victory in the July 4 general election. Zoopla also reported increased buyer demand, with estate agents holding more properties on their books than at any time in the past seven years.