Rising interest rates expected to cool UK housing market

London

UK house prices rose more than forecast in October despite the ending of a tax cut on purchases, but the Nationwide Building Society warned that a squeeze on living standards and rising interest rates are likely to cool the market.

The average price of a home rose 0.7 per cent from September, the mortgage lender said on Wednesday (Nov 3). Economists had expected a gain of just 0.3 per cent. The annual pace of growth was little changed at 9.9 per cent.

The increase meant the price of a typical UK home has now passed the £250,000 (S$459,334) mark, a rise of £30,728 since the Covid-19 pandemic struck in March 2020.

October saw the ending of a tax cut on purchases that has helped fuel a housing boom since it was introduced in July 2020. But other factors supporting the market remained in place, including shortages of homes for sale and pandemic-driven demand for larger properties away from city centres.

Nationwide said the outlook is "extremely uncertain", with accelerating inflation and looming tax rises piling pressure on family budgets.

The expectation that the Bank of England (BOE) will raise interest rates to contain inflation as early as Thursday is also prompting high-street banks to increase mortgage costs.

"Consumer confidence has weakened in recent months, partly as a result of a sharp increase in the cost of living," said Robert Gardner, Nationwide's chief economist.

"Even if wider economic conditions continue to improve, rising interest rates may exert a cooling influence on the market, though the impact on existing borrowers is likely to be modest."

Homeowners will be partly insulated because the share of outstanding mortgages on variable interest rates has fallen to a record low of around 20 per cent, down from a peak of 70 per cent in 2001, Nationwide said.

Markets expect the BOE to increase its current 0.1 per cent benchmark rate to 1 per cent by the middle of next year. That would see typical payments on a variable-rate mortgage rise by £64 a month to £660, said Nationwide. BLOOMBERG