Britain’s housing market is expected to avoid a slump triggered by rising interest rates, despite a drop in house price inflation to zero in May, according to analysts.
The Office for National Statistics said a decline in month-on-month growth from 0.5% in April to 0% in May meant the annual rate of house price inflation dropped to 1.9%.
However, a bigger than expected fall in UK inflation has meant financial markets are no longer expecting interest rates to increase as sharply, helping the housing market.
Meanwhile, rents jumped for the 14th consecutive month, by a record 5.1%, adding to concerns that the private rental market is struggling to meet a rising level of demand from people unable to buy a home.
A rise in mortgage rates and the cost of living crisis have prevented many people from entering the property market over the last year, leading to a cut in the number of transactions and the end of a two-year, 20% price spurt.
Recent figures from the Nationwide and Halifax have shown annual prices falling, but the ONS’s broader measure of the market, which includes cash buyers, found that annual property inflation had narrowly avoided going backwards.
Some forecasters have predicted a decline in prices of 10% or more over the next year in response to the rise in interest rates to 5%, but Barret Kupelian, the chief economist at the consultancy PwC UK, said a fall in the consumer prices index (CPI) in June was likely to persuade the Bank of England to moderate further increases in the cost of borrowing.
“The latest inflation reading, which was lower than economists’ expectations, means financial markets no longer expect the Bank of England’s base rate to peak at 6.5%,” he said. “We also expect next month’s headline inflation reading to garner another positive response from financial markets. This would mean that those intending to refinance their mortgages in the next few months could do so at possibly more favourable mortgage rates than those on offer at present.
“This effect, coupled with possible real wage growth, could mean the housing market could be in a considerably different place in six months’ time, with a bounceback possibly in sight.”
Marc von Grundherr, a director of estate agents Benham & Reeves, said: “The pandemic property rollercoaster ride has certainly ground to a halt so far in 2023, but rather than the market coming off the rails, what we’re now seeing is house prices returning to pre-pandemic levels.”
Average house prices increased over the 12 months to May to £304,000 in England, £213,000 in Wales, £193,000 in Scotland, and £172,000 in Northern Ireland.
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The north-east recorded the highest annual percentage change of all English regions with a 4% increase in the 12 months to May 2023, while the east had the lowest at 0%.
Rhys Schofield, a managing director at the Derbyshire-based mortgage advisers Peak Mortgages and Protection, said landlords were struggling to keep rents in check after a series of cost increases that they were unable to absorb.
Michelle Lawson, a director at the Fareham-based broker Lawson Financial, said: “With rising mortgage costs, increased regulatory costs and the removal of section 24 [rental income tax changes], landlords cannot absorb these rises any more and they are naturally having to be passed up the chain.”
