UK house prices rising gradually but rate hike likely to weigh

UK house prices continued to rise modestly in October, according to data from Nationwide, though a likely interest rate hike from the Bank of England could soon weigh on the sector.

House prices rose 0.2% month-on-month last month, climbing 2.5% year-on-year after the previous month's increase was revised to 2.3% and up from August's four-year low of 2.1%.

Annual house price growth, per Nationwide, has remained within a 2-4% range since March, hitting a high of 3.1% in June.

Nationwide said the average price of a UK home was £211,085 in October, from £210,800 a month earlier.

If the Bank Rate is increased, as expected, by 0.25% this week then monthly payments on the average variable mortgage will increase by £15 to £665, equivalent to £180 per year.

Robert Gardner, Nationwide's chief economist, acknowledged would not be welcome news for many borrowers, with real income rates still at levels prevailing in 2005.

He said house price growth was remaining modest due to lower consumer confidence amid pressure on household incomes as wages rise more slowly than the cost of living, though he said a lack of homes on the market was providing support to house prices, along with low interest rates.

Ahead of the BoE's meeting, Gardner said: "The proportion of borrowers directly impacted by a rate rise will be smaller than in the past, in part because the vast majority of new mortgages in recent years were extended on fixed interest rates."

He noted that the share of outstanding mortgages on variable rates has fallen to a record low of around 40%, down from a peak of close to 70% in 2001.

Nationwide itself said last month that it would increase rates across its range of variable mortgages in the event of an increase in the Bank Rate.

House price growth is likely to slow soon after the MPC raises interest rates this week, said economist Samuel Tombs at Pantheon Macroeconomics, pointing out that Nationwide’s index is based on its mortgage offers for people who likely began looking to buy a home before the MPC warned in mid-September that interest rates will rise soon.

With the RICS residential market survey recently showing a sharp fall in new buyer enquiries in September, while new sale instructions dropped only marginally, and Rightmove reported lower growth in online asking prices, Tombs foresaw continued low growth for the housing market.

"With real wages still set to fall for another six months and mortgage rates about to rise—particularly after February, when new lending will no longer generate borrowing allowances for banks from the Term Funding Scheme—it would be premature to conclude from today’s data that the worst has passed for the housing market," he said.

Howard Archer, chief economic advisor to the EY ITEM Club, said he saw house prices remaining subdued through the tail end of 2017 and then rising a modest 2-3% in 2018.

He agreed it was "very possible" a likely BoE interest rate hike on Thursday will weigh down on housing market activity.

"While any increase in interest rates would be small and mortgage rates would still be at historically very low levels, the fact that it would be the first rise in interest rates since 2007 could have a significant effect on housing market psychology.

"Having said that, the BoE has regularly stressed that interest rates will rise only gradually and to a limited extent."

Despite a modest overall rise in mortgage approvals from mid-2017 lows, he remained skeptical about any marked housing market upturn.