UK house prices bounced back in September, more than reversing August’s fall, but looking past the monthly volatility, house price growth over the last twelve months remains muted.
There is now growing evidence that the effects of April’s change in the Stamp Duty thresholds are now in the rear-view mirror and from here the market will be driven by more fundamental economic conditions.
However, the outlook for the housing market remains modest. The recent strength of wage growth has made housing slightly more affordable, although most affordability metrics continue to look stretched.
The situation is exacerbated by financial markets anticipating no further interest rate cuts until next year, which may result in an increase in mortgage rates in the near-term. However, mortgage rates should eventually fall back as the Monetary Policy Committee (MPC) restarts interest rate cuts in the first half of next year.
“House prices picked up by 0.5% month-on-month in September according to the Nationwide price gauge, which more than recovers last month’s 0.1% fall,” said Matt Swannell, Chief Economic Advisor to the EY ITEM Club.
“Looking past the month-to-month volatility, the house price data continues to paint a picture of muted growth, with prices 2.2% higher than last September, a little stronger than the 2.1% annual growth seen in August.”
Swannell noted that through most of this year, house prices have been influenced by April’s change in stamp duty thresholds as buyers looked to rush through transactions ahead of the deadline. However, it appears that the impact of this has now faded.
The recovery in mortgage lending over the summer looks to have topped out, with mortgage approvals having settled back to around their pre-pandemic average.
Meanwhile, housing transactions have recovered back to the levels seen last year, he said.
“With the temporary stamp duty threshold changes no longer significantly affecting the market, prices will be driven by more fundamental factors such as housing valuations and mortgage rates.
“The housing market looks set to continue experiencing modest growth. On the one hand, the recent strength in pay growth has seen affordability improve slightly, although it remains stretched.”
On the other hand, the situation for many buyers will be made more difficult by slowing real income growth and mortgage rates that could be set to rise, as financial markets do not expect interest rates to be cut again until next year, he said.
“On balance, it appears likely that 2026 will see another year of modest house price growth, with the Bank of England eventually restarting interest rate cuts in the first half of the year.”
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