House prices rise 2.9% – will the recovery continue?

House prices in the UK rose by 2.9% on an annual basis in September, according to figures released by HM Land Registry. This brings the average UK house price to £292,000. Although prices fell by 0.3% on a monthly basis (September versus August), there is evidence that a house price recovery is underway with more buyers returning to the market as interest rates fall.

Provisional figures released by HMRC at the end of October suggest that residential transactions were 9% higher in September 2024 than September 2023, on a seasonally-adjusted basis. They were also marginally higher (less than 1%) than August 2024.

Commenting on the latest house price data, Ben Nichols, managing director at asset management firm RAW Capital Partners, says: “Prices may have slowed month on month, but the annual price increase, coupled with higher levels of market activity in recent weeks, demonstrates the continued recovery that the market has been experiencing since the Bank of England began its rate-cutting cycle.”

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The Bank of England has cut interest rates twice since the summer, bringing the base rate from a peak of 5.25% to 4.75%. The second cut, which took place on 7 November, isn’t reflected in the latest house price data.

The picture going forward isn’t all rose gardens and white picket fences, though. Recent headwinds could slow the pace of the recovery. Economists and investors have tempered their expectations for interest rate cuts in the aftermath of the Autumn Budget, with inflation now expected to stay slightly higher for longer. This is already having a knock-on effect on the mortgage market.

Longer term, developments further afield (such as Trump’s return to the White House and geopolitical tensions in the Middle East) could also fan the embers of inflation. The Bank of England will likely consider these risks when thinking about the timing of future rate cuts.

Where are house prices rising the fastest?

Northern Ireland is experiencing the fastest house price growth of the UK regions, with prices up 6.2% on an annual basis in the third quarter (July to September).

The other UK regions use monthly rather than quarterly data, meaning they are not directly comparable with Northern Ireland. However, in September, prices rose by 5.7% on an annual basis in Scotland, 2.5% in England and 0.4% in Wales.

Of the English regions, the North West saw the fastest house price growth at 6.5%. The only region where prices fell was London, down 0.5% compared to a year ago. Prices in the capital are particularly high, with the average house now costing £525,586. This suggests affordability constraints could be creating challenges.

Affordability pressures could be creating challenges in London and the South

House price recovery: will economic headwinds shake the foundations?

There is often a seasonal slowdown at this time of year, but nervousness in the lead-up to the Autumn Budget may have also dampened house price growth in September.

Alex Upton, managing director at Hampshire Trust Bank, says some investors delayed decision-making, “waiting to see if any tax changes would impact their plans”. Others rushed to sell, as speculation about a capital gains tax hike spooked the buy-to-let market. In reality, this never materialised for residential property, only other assets like shares and funds.

One measure chancellor Rachel Reeves did announce was a stamp duty hike on second homes, with the surcharge rising from 3% to 5%. The measure is intended to support first-time buyers and those buying a main residence by giving them a competitive advantage over landlords.

Buy-to-let investors complain that the change creates another hurdle in a market that has become less profitable in recent years. The risk is that it will decrease rental supply further and push rents higher at a time when the rental market is already at crisis point.

Markets have also turned more bearish on rate cuts in the aftermath of the Budget (and in light of developments on the global stage). If rates fall more slowly than previously anticipated, this could also reduce the pace of the recovery in the housing market.

Mortgage rates have been adjusting to the new outlook in recent weeks, ticking upwards despite the recent base rate cut on 7 November. This will add to existing affordability pressures for those looking to buy.

“Affordability remains a key theme throughout the market, but first-time buyers face a particularly challenging landscape, with prices for starter homes rising annually but falling slightly month-on-month,” says Holly Tomlinson, financial planner at wealth management firm Quilter.

“With rates having gone up in the last few months despite a cut to the base rate, first-time buyers continue to have the rug pulled from beneath them,” she adds.