UK house prices hit a fresh record last month, but the market may be cooling off

Average UK house prices rose in January shows Halifax data but there are signs that the market is cooling down. Saloni Sardana looks at why prices may decline.

Terraced houses in Bath
The Bank of England raised interest rates last week to 0.5%, meaning mortgages may become a little more expensive.
(Image credit: © Jason Alden/Bloomberg via Getty Images)

The average UK house price hit £276,759 in January. That’s a fresh record, and £24,500 higher than this time last year.

That said, the rate of house price inflation showed possible signs of cooling down. The latest reading from Halifax showed that prices rose by 0.3% during the month, the smallest such increase since June 2021. That won’t be a huge comfort to potential first-time buyers, given that the annual rate of inflation still stands at 9.7%.

Cost of living crisis to weigh on house growth

Russell Galley of Halifax said that affordability remains a big issue for consumers as “house price rises continue to outstrip earnings growth”. Meanwhile, rising living costs are also squeezing the available income for servicing mortgages.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Consumers are being financially squeezed from almost all corners, with energy prices at record highs (the energy price cap increased by £693 last week), plus a national insurance hike coming in April.

Mortgages may also become at least a little more expensive – the Bank of England raised interest rates last week to 0.5% and investors are currently betting the central bank will hike interest rates at least twice again this year in a belated attempt to tackle inflation.

“While the limited supply of new housing stock to the market will continue to provide some support to house prices, it remains likely that the rate of house price growth will slow considerably over the next year,” said Galley.

Martin Beck, chief economic advisor to EY ITEM Club, an economic forecasting group, reckons January’s slowdown in Halifax’s January reading may be a harbinger for things to come. “This year won’t see a boost to prices from the stamp duty holiday which ran through much of 2021. To the extent the tax holiday brought forward purchases, its after-effects may drag on housing market activity in the near term.”

He said expected interest rate hikes coupled with the spike in the cost of living from higher inflation and tax rises mean “it’s likely that fewer people will be able to afford to borrow the necessary amount they need to buy at higher mortgage rates”.

But while EY Item Club expects a slowdown in the housing market, it doesn’t expect house prices to drop, because a buildup of household savings during the pandemic should offset the impact of higher costs.

“With around 80% of the stock of UK mortgage debt at fixed rates, most mortgage holders are well insulated from increases in mortgage rates in the short term,” it said.

How different regions in the UK performed

Wales recorded the strongest pace of annual growth at 13.9%, with the average house price now standing at £205,253. Northern Ireland also recorded strong growth with prices up 10.2% compared to last year, giving an average property value in January of £170,982.

House price growth cooled a little in Scotland to 8.9%, with the average property price now £192,698. In England, the North West was the strongest-performing region, with the average price up by 12% on the year, to £213,200.

While London was still the weakest-performing area of the UK, the capital continued its upward trajectory, with annual price growth rising for a third consecutive month to 4.5%. That’s double the rate recorded in December and the most robust performance in a year.

Saloni Sardana

Saloni is a web writer for MoneyWeek focusing on personal finance and global financial markets. Her work has appeared in FTAdviser (part of the Financial Times),  Business Insider and City A.M, among other publications. She holds a masters in international journalism from City, University of London.

Follow her on Twitter at @sardana_saloni