Impact of Interest Rate Rise on UK House Prices

Buy-to-let landlords keen to sell their property investments are in for a price shock.

Mortgage lenders are warning home values are about to tumble as interest rate rises begin to bite.

They argue that the market needs to catch up to rate changes, and house prices will only reflect the rising cost of mortgages in the coming months.

Inaccurate figures

Figures from the Office of National Statistics (ONS) released this month track price changes until July, so do not include data from August and September. This makes them a less accurate measure of current housing market performance.

The ONS house prices rose 0.6 per cent in the year to the end of July, while the average cost of a home increased by £2,000 in the year to £290,000 - but remained £2,000 below the market peak of £292,000 achieved in November.

The study also showed house prices were up in all English regions except London (-0.8 per cent) and the South West (-1 per cent).

Homeowners in the North East saw the most significant increase as prices were up 2.7 per cent. Yorkshire & Humber saw the second-largest price rise of 2.5 per cent.

Annual house price changes where you are

“London's average house prices remain the most expensive of any region in the UK, with an average price of £534,000 in July 2023 and an annual inflation rate of negative 0.8 per cent in the 12 months to July 2023. While London prices increased between June and July 2023, they increased by a larger amount between the same months last year,” said the report.

“The North East continued to have the lowest average house price of all English regions, at £163,000 in July 2023.

“The North East is also the region with the highest annual house price inflation, with average prices increasing by 2.7 per cent in the 12 months to July 2023, down from an annual inflation of 5.7 per cent in June 2023.”

The most significant house price fall in 14 years

Two of Britain’s biggest mortgage lenders - the Halifax and Nationwide - have released house price figures for the year to August 31.

The Halifax claims house prices dropped 4.6 per cent in a year - the most significant annual price drop since 2009. The bank says an average home now costs £279,569, a £5,000 decrease since July and back to the level last seen at the start of 2022.

“It’s fair to say that house prices have proven more resilient than expected this year despite higher interest rates weighing on buyer demand. However, there is always a lag effect where rate increases are concerned, and we may now be seeing a greater impact from higher mortgage costs flowing through to house prices. Increased volatility month-to-month is also expected when activity levels are lower, though overall, the pace of decline remains in line with our outlook for the year,” said Halifax Mortgages director Kim Kinnaird.

The Nationwide reported an even more significant price drop - 5.3 per cent since August 2022, representing a £14,600 decrease in the value of an average home.

House Price Digest FAQ

The figures for average house prices and movements in property values can be confusing if you need to learn how to read the data.

Here are some of the most asked questions about house price indices.

Why are the average property prices different in each report?

The reports use other data to draw conclusions and take the data from different periods.

Nationwide and Halifax base their indices on customer data, which are much smaller samples than the national data analysed by the ONS.

Acadata's methodology includes analysis that no other index uses.

Each organisation collects data over different periods, making a direct comparison difficult.

What is the average house price?

There's no such thing as an average home. The figure is calculated from the total value of all transactions in the sample divided by the number of homes changing hands.

What are the asking and sale prices?

The asking price is the amount an owner wants to achieve from a house sale, while the sale price is the negotiated amount the buyer pays.

Which house price index is the best?

All have flaws because of the restricted data, but the one with the broadest sample comes from the ONS. Unfortunately, the ONS data is usually the last to market and out of date by two to three months on publication.