UK Housing Market Sees Steady Recovery
The UK housing market showed signs of recovery last month, as house prices rose by 0.6% in July, reaching an average of £272,664. This marks a positive shift after June's steepest month-on-month decline in over two years, which came on the heels of the end of a temporary stamp duty tax break.
Nationwide’s latest report highlighted that the annual house price growth also edged up to 2.4%, up from 2.1% in June. With 64,200 mortgages approved in July, the property market continues to show resilience, even amid ongoing economic uncertainty. One of the most notable points in Nationwide's findings is that homebuying is now more affordable than it has been in over a decade. The price-to-income ratio for a typical UK home has dropped to 5.75 times average income, the lowest level in years. This shift, alongside a boost in the availability of higher loan-to-value mortgages, is helping ease some of the deposit barriers that many first-time buyers face.
Robert Gardner, Chief Economist at Nationwide, noted, “This improvement is easing the pressure on potential buyers, despite the ongoing affordability challenges. However, borrowing costs remain high.” Indeed, while affordability is improving, interest rates remain a significant hurdle. The interest rate on a typical five-year fixed-rate mortgage with a 25% deposit is still more than three times higher than it was in autumn 2021. These elevated rates are being felt across the market, but despite this, the market’s core activity is holding steady.
While interest rates remain high, home affordability improves and buyer confidence grows.
According to market pundits, transactions in the market are remaining stable, and there is an expectation for modest improvement in the coming months. This is especially likely if the Bank of England follows through with anticipated interest rate cuts. This could be a key turning point for the market. A decision from the Bank of England’s Monetary Policy Committee (MPC) on August 7th could lead to a reduction in the UK base rate, currently at 4.25%. Financial markets are forecasting a drop to 4% next week, and possibly to 3.75% by the year’s end. A rate cut could inject much-needed confidence into the housing market, providing more breathing room for buyers who are currently grappling with the high cost of borrowing.
Despite these positive expectations, inflation unexpectedly ticked up to 3.6% in June, surpassing the Bank of England’s target of 2%. This has raised concerns that the MPC may adopt a more cautious approach when it comes to interest rate cuts, leaving buyers in a holding pattern until more clarity is provided. Nonetheless it can be noted, while the road to recovery is not without challenges, there are clear signs of improvement in the housing market. With affordability on the rise and expectations of interest rate reductions in the near future, the UK housing sector may soon see a more balanced environment for buyers and sellers alike.
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