UK house prices returned to growth in May, according to Nationwide, as buyers' confidence was buoyed by wage growth and lower inflation.
The Nationwide House Price Index for May 2024 shows a positive turn in the UK housing market. House prices increased by 0.4% month-on-month, marking the first rise since February 2024. This brings the average house price to £264,249, an increase from the previous month’s average of £263,788. Annually, the growth rate has improved to 1.3%, up from 0.6% in April.
The market’s resilience is attributed to factors such as improved consumer confidence, robust wage growth, and lower inflation, which have helped alleviate some affordability pressures despite recent increases in long-term interest rates. There is also an anticipation of potential interest rate cuts over the summer, which may further boost market activity and stabilize prices.
Despite this monthly growth, the average house prices are still below their levels from May 2022, when they nearly reached £270,000. The ongoing economic conditions and affordability challenges, particularly high mortgage rates, continue to pose significant barriers for many potential buyers.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says “with inflation continuing to fall, it looks increasingly likely that a rate cut is on the cards, perhaps not as early as the June meeting of the Bank of England but in August. This should give the market a welcome boost after the general election, particularly as some would-be buyers have been waiting for the downwards trajectory in interest rates before committing. This, rather than the election outcome, is more likely to influence homebuyer decision making.”
Mortgage rates in the UK have been comparatively high because the Bank of England is not forecast to cut interest rates as quickly or as steeply as initially predicted at the beginning of this year.
May's gain reverses a 0.4% drop in the previous month.
Andrew Harvey, senior economist at Nationwide, said"I think we have been a little surprised actually by the resilience in the market because those affordability pressures have been quite significant."
Over the year to May, house prices rose by 1.3%, said Nationwide. That compares to 0.6% growth in the 12 months to April. The building society said that consumer confidence had "improved noticeably over the last few months, supported by solid wage gains and lower inflation."
An average two-year fixed rate mortgage is currently 5.92%, according to Moneyfacts, the financial information firm. That compares to 5.83% in April. The rate on the average five-year fixed mortgage is 5.49%, up from an average of 5.4% last month.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said that "high house prices are a barrier for many buyers because when coupled with higher mortgage rates, the monthly payments are pushed out of reach. Buyers are pushing through, which owes an awful lot to people's confidence in their own personal financial position. The easing of inflation, coupled with robust wage growth, and relatively low levels of unemployment, mean people are feeling more secure."
The latest figures from the Office for National Statistics showed that average pay, excluding bonuses, rose by 6% between January and March.
Interest rates
The Bank of England will announce its next interest rate decision on 20 June. It has kept borrowing costs at 5.25% since last year. The Bank has a target to keep inflation at 2%.
Mr Harvey said that "while headline inflation has been slowing - down to 2.3% in the year to April - "it is a complicated picture."
One measure of inflation that the Bank of England looks at when it considers rate cuts is the services sector, which includes areas such as education and hospitality and gives a snapshot of pay growth and unemployment numbers. That measure of inflation has failed to slow as much as the headline figure, dipping only marginally to 5.9% in April.
Mr Harvey continued "some of the underlying pressures of price inflation, such as in the services sector, they are still stubbornly high. That is one of the reasons that the Bank of England are perhaps not quite ready to cut interest rates just yet because those pressures are still there and they are still very aware of the impact they could have.”
In compiling its figures, Nationwide looks at its own mortgage lending and does not include cash buyers or buy-to-let deals. Cash buyers account for about a third of housing sales.
The building society said that with the general election coming up on 4 July, it had analysed house price movements around previous general elections and concluded that there was no significant effect.
What's happening to UK mortgage rates?
Mortgage rates have hit house prices over the past 18 months as they have dampened property market demand. But could interest rates fall soon?
Mortgage rates have been one of the housing market's major sticking points over the last 18 months.
While inflation has kept buyers out of the market by eroding the value of their deposits, its knock-on impact on interest rates and market sentiment has been even more devastating. Since Liz Truss's ill-fated premiership, which threatened to push inflation through the roof, we have seen three distinct spikes in rates.
The most recent set of hikes began soon after the turn of the year, and led to a near-0.5% point surge in rates. It largely came about as a result of waning market confidence in the Bank of England's ability to bring the base rate down from its current 16-year high. While there are hopes that mortgage rates will fall soon, markets seem resigned to the fact that the days of 1% or 2% rates are a long way off. That could come as a shock for borrowers looking to remortgage from rates they secured five years ago.
Meanwhile, an increasing number of young people are taking out "ultra-long mortgages" that they will still be paying off in retirement. They are doing this in a bid to get on the housing ladder, as well as lower their monthly repayment costs.
But is better news on the way? Here's everything you need to know.
Are lenders cutting mortgage rates?
According to Moneyfacts, the average two-year fixed-rate mortgage is now priced at 5.93% (correct as of 3 June). A five-year deal comes in at 5.50%.
These figures are close to the peak recorded in early May, and are more than half a percentage point below the record highs seen in July 2023. Prices have remained high despite last week's rate reductions from Halifax (-0.19%), TSB (-0.4%) and Leeds Building Society (-0.2%).
According to Nicholas Mendes, mortgage technical manager at broker John Charcol, "inflation remaining above the Bank of England's 2% target has been a big factor in why rates haven't come down. He said the rate of price rises was delaying" interest rate cuts, which was having a subsequent impact on swap rates. Fixed rates are priced on swap rates, this is a financial agreement where two parties exchange interest rate payments. Typically, one party pays a fixed interest rate, while the other pays a variable rate that fluctuates with market conditions.
When swap rates rise, it signals that the market expects higher future interest rates, prompting lenders to increase mortgage rates to maintain their profit margins. Conversely, when swap rates fall, it indicates expectations of lower future rates to stimulate economic growth, leading to reduced mortgage rates. Until the Bank of England's first interest rate cut is announced, he expects any fixed rate declines to be gradual and steady. But cuts are only a matter of when and not if."
The markets had been pricing in central bank rate cuts for June. However, due to the general election, there is now an expectation that they will not come in until the Bank of England's August or September meetings. The Bank has never cut rates immediately before an election since it was made independent in 1997.
Even if rates do come down further later this year, the lows of the late 2010s are unlikely to be replicated. Mendes added "no one can accurately predict where rates will be in a couple of years’ time. But it is clear that cheap rates are a thing of the past. Preparing in advance of when your deal is due for renewal will help soften the blow and avoid putting sudden pressure on your outgoings."
While the economic outlook is still difficult for many people, there is a bit of hope for some property buyers. For example, some lenders are offering more innovative products, which could aid first-time buyers. One of them is Yorkshire Building Society, which unveiled a 99% loan-to-value mortgage last month.
The mortgage rate is just one aspect of a deal though. Borrowers need to watch out for extra mortgage costs as many deals have high fees attached that could offset any savings compared with other deals with higher rates but lower charges. Mortgage product fees have increased to £1,141 on average as of early March, up £46 compared with a year ago.