In a surprising turn of events, UK house prices have surged at the fastest pace in nearly two years, defying expectations amid affordability challenges and higher borrowing costs. According to data from Nationwide Building Society, the average price of homes purchased through the lender jumped 3.7% annually in November, a significant acceleration from the 2.4% growth recorded in October.
The robust growth pushed average prices to £268,144, just shy of the all-time high reached in the summer of 2022. The figures paint a picture of a resilient housing market, even as elevated prices and interest rates well above pre-pandemic levels strain affordability for many buyers.
Puzzling Momentum in the Face of Headwinds
The acceleration in house price growth has left many experts scratching their heads. Robert Gardner, Nationwide’s chief economist, expressed his surprise at the trend, noting that affordability remains stretched by historic standards.
“The acceleration in house price growth is surprising, since affordability remains stretched by historic standards, with house prices still high relative to average incomes and interest rates well above pre-Covid levels”
– Robert Gardner, Nationwide Chief Economist
Despite these headwinds, housing market activity has held up relatively well in recent months. Mortgage approvals, a key indicator of demand, have approached pre-pandemic levels, suggesting that buyers are still keen to make moves in the market.
Solid Labor Market Underpins Demand
One factor supporting the housing market’s resilience is the strength of the UK labor market. Low unemployment, robust income growth, and household debt levels at their lowest relative to income since the mid-2000s have all helped to underpin steady rises in activity and prices.
“Solid labour market conditions, with low levels of unemployment and strong income gains, even after taking account of inflation, have helped underpin a steady rise in activity and house prices since the start of the year.”
– Robert Gardner, Nationwide Chief Economist
The monthly gain in prices was also impressive, with a 1.2% increase in November compared to October after adjusting for seasonal effects. This marked the largest month-on-month growth since the height of the pandemic-fueled housing boom in March 2022.
Doubts Over Sustainability of Price Gains
While the current momentum in the market is undeniable, some experts question whether it can be sustained in the face of still-stretched affordability. Ruth Gregory, deputy chief UK economist at Capital Economics, noted that the ratio of prices to incomes remains elevated by historical standards, potentially limiting the scope for further significant price appreciation.
However, Gregory also pointed to potential tailwinds for the market, including an anticipated drop in mortgage interest rates in the coming year. This could help to offset affordability pressures and support ongoing activity.
Budget Changes Add Short-Term Boost
The recent UK budget, delivered by Chancellor Rachel Reeves on October 30th, made some adjustments to stamp duty that could impact housing market dynamics in the near term. The new budget increased the tax on purchases of second homes, with the higher rates set to take effect from April 2025.
This change could spur a short-term uptick in transaction volumes as second-home buyers rush to complete purchases before the April deadline. However, this pre-deadline surge might be followed by a lull in activity in subsequent months as the market digests the tax changes.
Outlook: Cautious Optimism Tinged with Uncertainty
The unexpected acceleration in UK house price growth in November has injected fresh optimism into the market, but the path ahead remains uncertain. While solid labor market conditions and potential interest rate declines could support ongoing demand, the specter of affordability constraints looms large.
As we head into 2025, the key question is whether the UK housing market can maintain its momentum in the face of these competing forces. For now, buyers and sellers alike will be keeping a close eye on economic indicators, policy developments, and shifting sentiment as they navigate this dynamic and ever-evolving landscape.
Only time will tell if the current surge in prices is a temporary blip or the start of a more sustained upward trend. But one thing is certain: the UK housing market remains as fascinating and unpredictable as ever, with plenty of twists and turns still to come.
