UK house prices show annual growth of 2.5%

Figures from the Nationwide show that UK house prices increased by 0.2% in the month of October. The annual increase from 2.3% in September up to 2.5% in October is a three month high for the UK housing market which has been under pressure of late. It is proving extremely difficult to forecast in the short to medium term how UK house prices will perform having increased to an average value of £211,085. There are a number of factors coming into play which could actually see UK house prices supported in the foreseeable future.

Shortage of stock

A shortage of suitable stock has been a problem for the UK housing market from some time now. We have a lack of newbuilds and many homeowners are reluctant to upsize in the current economic environment instead deciding to stay put. This means that those who are brave enough to upsize are fighting with first-time buyers over a relatively small amount of housing stock. This increases competition which increases prices which drags the whole UK housing market higher. How long will this last? This is a question we have been asking for many years now.

Low mortgage rates

UK mortgage rates have been historically low for some time now in light of the 2008 US led mortgage crisis. There is talk that the Bank of England may increase UK base rates for the first time in a decade at its meeting later this week. A potential increase of 0.25% would push UK base rates up to 0.5% which is in itself minuscule but could lead to an increase in UK mortgage rates.

Even the Nationwide has confirmed that an increase of 0.25% in the UK base rates would likely be passed on in full to variable rate mortgage holders. Looking at the wider picture this increase is relatively small but in the current environment, with household incomes being squeezed, more funding diverted towards mortgage payments will place pressure on other areas of household expenditure.

Variable-rate mortgage holders

It was interesting to hear Nationwide executives discussing variable rate mortgage holders and the fact that in 2001 they represented 70% of outstanding mortgages. Slowly but surely this figure has fallen to a current record low of just 40% with many people looking to lock in fixed rate mortgages and take advantage of current low base rates. While this is obviously good news in the short to medium term some UK mortgage holders could see a significant increase in their payments when their fixed term ends and they either remortgage or switch to a variable rate.

It is difficult to guess whether the Bank of England will increase base rates this Thursday let alone in the weeks and months ahead but if we’re talking years ahead there is no way that UK base rates will be anywhere near their level today. You could argue there is pressure building across the UK housing sector, wages will struggle to maintain any equilibrium with mortgage rate increases and pressure on UK household incomes will mean a reduction in expenditure and a weaker economy. So, there could be trouble ahead?

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