In August, UK house prices experienced an unexpected decline, marking the first monthly drop since April, according to a report by Nationwide Building Society, one of the country's leading mortgage lenders. The modest 0.2% decrease contrasts with the expectations of economists, who had forecast a 0.2% rise from July.
Despite this monthly dip, house prices remain 2.4% higher than in August of the previous year. This annual increase is the fastest since December 2022, a period marked by the aftermath of the "mini-budget" crisis that led to a surge in borrowing costs. However, the 2.4% gain fell short of the median forecast of a 2.9% increase predicted by a Reuters poll.
Robert Gardner, Nationwide’s chief economist, noted that the UK housing market remains subdued but is showing resilience in the face of rising interest rates. He expressed cautious optimism about the market's future, suggesting that as the broader economy continues to recover, housing activity is likely to gradually strengthen. "Providing the economy continues to recover steadily, as we expect, housing market activity is likely to strengthen gradually as affordability constraints ease," Gardner said. The recent decision by the Bank of England (BoE) to cut interest rates on August 1, lowering them to 5% from a 16-year high of 5.25%, could provide some relief to the market. Investors are currently assigning a roughly one-in-four chance of a further rate cut in September, with a full cut expected by the BoE’s November meeting. These potential rate adjustments could further ease affordability constraints, potentially leading to renewed momentum in the housing market.
Signs of recovery and sector confidence
Despite the recent price dip, there are signs of renewed momentum in the UK housing market. A survey by Lloyds Bank released earlier in August showed a significant jump in confidence within the construction sector, which includes not only residential developers but also builders of infrastructure and commercial properties. Confidence levels rose by 14 points to 58%, reflecting growing optimism in the sector.
Additionally, the Royal Institution of Chartered Surveyors (RICS) reported earlier this month that its measure of expected sales over the next three months had reached its highest level since January 2020, just before the onset of the COVID-19 pandemic. This increase in expected sales could signal a potential uptick in market activity as the year progresses.
Long-term narket support and government initiatives
One factor likely to support house prices in the medium term is the ongoing shortage of properties on the market. Despite fluctuations in demand, the limited supply of available homes has consistently underpinned property values across the UK. In response to the ongoing housing shortage, the UK's new government has pledged to accelerate home-building efforts. On Thursday, it announced the formation of a group of experts tasked with speeding up the construction of housing developments that have been delayed by planning issues and bureaucratic red tape. This initiative is part of a broader strategy to address the chronic undersupply of housing in the country, which could help stabilize the market in the long term.
While the slight decline in house prices in August may raise concerns, the overall outlook for the UK housing market remains cautiously optimistic. With potential interest rate cuts on the horizon and increasing confidence in the construction sector, the market could see a gradual strengthening as economic conditions improve and affordability constraints ease. The government's commitment to accelerating home-building could also play a crucial role in shaping the future of the UK property market.