Emeritus Professor Joe Nellis who is Head of Economic Research at MHA, the accountancy and advisory firm says

UK Housing Market Stagnates

• Higher mortgage costs balanced by lack of housing supply
• Stagnant market of the last two years shows little sign of shifting
• An interest rate hike this month cannot be ruled out

The latest Lloyds House Price Index reports that average UK house prices fell by 0.2% in August and by 0.4% on an annual basis. This was the first year-on-year decrease since November 2023.

The housing market has come to a halt at a time of considerable economic uncertainty. Average UK house prices have barely moved over the past two years, although some areas have performed significantly better than others, particularly Northern Ireland, Scotland and parts of the North of England. Buyers continue to face relatively high borrowing costs alongside continuing pressures on household finances.

It was expected that the housing market would hold up, partly because real incomes have recovered from the severe cost-of-living squeeze of the past few years and because of the continuing shortage of housing supply.

But the market faces significant headwinds. Mortgage affordability continues to hold back buyer demand, while the recent rise in borrowing costs following renewed geopolitical tensions has reversed the improvement in mortgage rates seen earlier in the summer. Bank of England figures show mortgage approvals for house purchases falling to around 56,100 in July, compared with 58,200 in June, while the effective interest rate on newly drawn mortgages increased from 4.35% to 4.45%.

There are certainly no signs of a housing recovery on the horizon. Instead, the market is likely to experience an extended period of flat prices at best and relatively subdued activity.

Prospects for the housing market over the next year or so will depend heavily on inflation, interest-rate expectations and household confidence – as well as any decisions affecting the housing market announced in the Budget on 28 October.

While an interest rate hike on 17 September or later in the year remains unlikely it cannot be ruled out given the unpredictability of the global economy and events in the Middle East. Until that uncertainty is reduced it is likely the housing market overall will remain stagnant. Unless there is a stronger improvement in affordability and a meaningful reduction in mortgage costs, house prices are likely to remain broadly stable, with significant regional variations continuing beneath the relatively subdued national picture.