UK house price growth slows as inflation surge threatens to push mortgage costs higher

UK house price growth slowed for a fourth consecutive month in August, as rising inflation and renewed uncertainty over mortgage costs threatened to further dampen demand in an already fragile property market.

The annual rate of house price growth fell to 0.9 per cent in August, down from 1.2 per cent in July, according to figures from the Office for National Statistics (ONS). Growth weakened in six of England’s nine regions, underlining the loss of momentum across much of the market.

The average UK home was valued at £273,000 in August, with prices rising at markedly different rates across the country.

England recorded annual growth of just 0.4 per cent, taking the average price to £294,000, while Wales saw prices increase by 3.1 per cent to £216,000. Scotland recorded growth of 2.9 per cent, with the average home costing £198,000.

Northern Ireland was the strongest performer, with prices reaching £202,000 in the second quarter, up 9.2 per cent year on year. Within England, the North East recorded the highest annual inflation, at 3.2 per cent.

London, by contrast, remained a weak spot. Average property values in the capital fell by 2.2 per cent in the year to August, dragged down by a 5 per cent decline in flat prices. Flats account for half of all property sales in London, compared with about a fifth across Britain, the ONS said, leaving the capital particularly exposed to weakness in that segment.

The slowdown comes as the outlook for buyers becomes more challenging. Consumer prices inflation rose to 3.5 per cent in September, from 3.1 per cent in August, according to separate ONS figures released on Wednesday. The increase was the highest since October last year and exceeded the 3.4 per cent rate expected by some economists.

The inflation surprise has strengthened expectations that interest rates could rise again, threatening to push up borrowing costs just as households are struggling with stretched affordability.

David Hollingworth, associate director at L&C Mortgages, said the latest inflation figures “are likely to cement expectation of a base rate rise to come in November”.

Borrowers nearing the end of fixed-rate mortgage deals face a particularly uncertain environment, he added. “Those coming to the end of a current fixed (mortgage) deal will not only face higher rates but also a more volatile market where deals can come and go quickly.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, warned that borrowers should prepare for higher costs. Although the Bank of England held its base rate at its last meeting, volatile swap rates — which underpin mortgage pricing — have led lenders to move in different directions, with some cutting rates while others increase them.

The pressure is also being felt in the rental market. Average private rents across the UK reached £1,406 a month in September, an increase of £52, or 3.8 per cent, over 12 months. Higher rents can make it harder for prospective buyers to accumulate deposits, while elevated mortgage costs threaten to keep others renting for longer.

“As we move towards winter, the picture facing prospective buyers is darkening,” said Karen Noye, a mortgage expert at wealth manager Quilter. Higher headline, core and services inflation, she said, made meaningful interest rate cuts harder to envisage and raised the risk of mortgage costs remaining elevated for longer.

“Affordability is already stretched for many buyers and uncertainty over where mortgage rates go next is adding another reason to hesitate,” she added.

The government’s forthcoming Budget could offer some relief, depending on whether proposed measures translate into meaningful improvements in affordability. Noye said the Budget should provide greater clarity on plans to help first-time buyers, including proposals for a first-time buyer Isa and a first homes scheme.

If such policies help more people onto the property ladder, the benefits could extend beyond first-time buyers by enabling existing owners to move, she said. Nick Leeming, chairman of estate agency Jackson-Stops, argued that the Budget must support a housing market that works “at every stage of people’s lives”.

For now, agents say the market is slowing rather than grinding to a halt. Nicky Stevenson, managing director of Fine & Country, said sellers who set realistic prices from the outset and buyers who were financially prepared could still find opportunities.

Richard Donnell, executive director of research at Zoopla, said homes that sold were moving almost as quickly as a year earlier, but buyers were becoming more selective, particularly when properties were poorly presented or priced beyond what purchasers were willing to pay.

Tom Bill, head of UK residential research at Knight Frank, said the outlook remained vulnerable to geopolitical developments in the Middle East. Downward pressure on prices could reverse quickly if the conflict de-escalated, he said, but affordability constraints were already taking their toll, particularly in London.

Sarah Coles, head of personal finance at AJ Bell, said prices had barely risen over the year, increasing by less than 1 per cent. Rising mortgage rates had “poured cold water over a market that was already sputtering” amid rapid house price increases, global instability and expensive property.

With inflation moving in the wrong direction and the prospect of cheaper borrowing receding, the housing market faces a difficult winter. For buyers, the combination of high prices and uncertain mortgage costs may encourage caution; for sellers, realistic pricing could prove increasingly important in securing a deal.