What's fuelling house price growth?

Senior economist reviews House Price Index – and says when double-digit increases will likely end

What's fuelling house price growth?

Strong labour market conditions and a shortage of homes are two of the prime movers that are continuing to fuel house price growth, according to Andrew Harvey (pictured), senior economist for Nationwide Building Society.

House prices grew in May for the tenth month in a row, increasing by 11.2% and keeping annual price growth in double digits, the latest Nationwide Building Society’s House Price Index showed this week.

Although the rate of increase was more modest compared to the previous month, when it rose by 12.1%, housing experts expressed surprise at the housing market’s momentum, given current inflationary pressures and the rise in the cost of borrowing – both of which are putting a financial squeeze on household budgets.

Read more: UK house prices rise for 10th consecutive month

Speaking to Mortgage Introducer, Harvey said the ongoing upward trend reflected the current strong labour market conditions and the lack of homes for sale.

“With unemployment being near 50-year lows and the lack of stock, it seems to be giving a lot of upward pressure on prices, particularly in certain hotspots,” he said.

He expressed surprise at how resilient first-time buyer demand had been, suggesting that some of the build-up in savings over the last two years, amounting to an extra £190 billion, had made its way to protect this segment.

He said: “It's not evenly distributed as you would imagine, but of course that may well go towards a second home, so these funds will sort of trickle back into the housing market for sure.”

However, he acknowledged that the impact of the cost-of-living crisis and rising interest rates would eventually be reflected on house prices.

“The base effects will sort of start to kick in pretty soon, given where we were last year. I think it's either going to be this month or maybe the next one that we’ll see the last of double-digit growth, and from there on we should be on a trajectory back down to single digits later in the year,” he revealed.

In those property hotspots, bidding wars were still evident, especially where supply was tight, he noted, adding that second home purchases in certain rural areas, mostly in the south-west of England and Wales, were particularly buoyant.

This had resulted in house prices rising by nearly 30% in predominantly rural areas, although the increase in urban centres had been a relatively modest 18% by comparison.

Read more: Consumer confidence has returned to equity release – executive

In what he described as a “race for space”, Harvey said this was a reflection of people’s desire to continue working remotely post-COVID.

He said: “That's definitely an element. There are a couple of cases which stood out. There were a lot of parts of Devon, South Wales, Cotswolds and The Broads which are heavily associated with tourism and where you see higher second homeownership rates.

“The pandemic obviously resulted in quite a big shift in housing preferences. This has boosted a lot of additional demand for more people to consider moving, and this is true across all of the different sectors as well, both for those who rent and those who buy.

“Definitely, the race for space still seems to be a big theme.”

Looking ahead, he was asked whether the looming clouds in the US housing sector, with home sales falling sharply and prices starting to flatline, could be replicated in the UK market, given that both economies have been hit with high inflation and rising interest rates.

“Even in the event of a downturn, [UK] households are in quite a strong position to weather that storm. One of the benefits of the UK mortgage market, of course, is that it’s incredibly competitive.

“The rises, which we've seen in swap rates, for example, haven't resulted in mortgage rates rising by anywhere near as much [compared to the US]. Over 80% of the UK mortgage stock is on fixed rates. So even if the Bank of England were to increase rates more rapidly, at least in the short term, those households are insulated from those rate rises.”

The impact of a possible recession would also be limited, he reckoned. “Unless it’s something incredibly severe, then I suspect we wouldn't see too much of a slowing in growth. But it's unlikely that we'd see a big release of [housing] supply onto the market unless more selling was to come back – and it seems still fairly unlikely at the moment.”