House prices

Real estate prices: where are we?

Since the start of the pandemic, the average house price in the UK has risen from £217,911 to £270,452, an increase of 24.1%

Much of this growth has been fueled by the pandemic-induced “race for space” as many people have sought more space (inside and outside their homes), a change in lifestyle or a move to be closer to family, driving up booming prices in the UK’s most popular hotspots.

But how will rising interest rates and the cost of living crisis impact the market, and what difference will recently announced changes to mortgage affordability stress tests have?

At first glance, the latest National House Price Index data suggests that house price growth is still robust.

Annual house price growth in the UK remained at 10.7% in June.

This is the eighth consecutive month of double-digit price increases, meaning UK property prices have not seen such high levels of growth since 2005.

However, there are signs that buyer demand is beginning to moderate in response to five successive interest rate hikes.

On closer inspection, the same index shows that on a monthly basis, prices rose only 0.3% in June.

This may be the 11th consecutive monthly increase, but it is also the smallest increase in this period.

And with the Bank of England warning that it could raise the base rate by 0.5% in August, the outlook for the rest of the year looks less positive.

Basic Economy

In the short term, the market will remain driven by the secular dynamics of supply and demand.

Between July 2020 and May 2022, newly agreed sales have consistently been above their pre-pandemic norm (the 2017-2019 average for each month).

Meanwhile, new instructions consistently fell short of the same benchmark.

And such high activity levels have eroded the few new offerings that have come to market.

As a result, the number of properties available for purchase is low, which should protect the market from price declines or even slow price growth levels.

The impact of these simple imbalances between supply and demand is already reflected in the geographic pattern of price growth.

In the year to June, the strongest price growth occurred in the most stock-constrained market, the South West of England (14.6%).

Meanwhile, the lowest was in London (5.9%) where stock levels are closest to their pre-pandemic norm.

How does this evolve given the economic context?

June this year marks the first month since the start of the housing market mini boom where agreed sales fell below their pre-pandemic norm nationwide.

But they were only slightly below that watermark.

While these may be the first signs of activity normalizing, it will take some time for available inventory levels to return to normal.

The Royal Institute of Chartered Surveyors survey can also be a good early indicator of property price movements.