UK house price growth halves amid rising mortgage interest rates

Annual house price growth halved in the UK last month, as economic uncertainty sparked by conflict in the Middle East continued to deter homebuyers.The average price of a British home rose 0.8% in the year to September to £274,251, according to Nationwide. That was half the rate recorded in August, when house prices grew 1.6% year on year. It also marked the slowest pace of home price growth since December last year.house prices across the UK fell 0.2% month on month, after taking account of seasonal effects.The housing market has been subdued in recent months, as the US-Israel war with Iran and resulting disruption to Gulf oil and gas flows drive up energy costs and inflation fears. That has fed through to higher interest rates on mortgages, making it more expensive for people to buy new homes.“Geopolitical tensions remain high, with the conflict in the Middle East exerting upward pressure on energy prices, fanning inflation concerns,” the Nationwide chief economist, Robert Gardner, said.“This in turn has led to mounting financial market expectations of Bank [of England] rate increases, which has maintained upward pressure on the market interest rates which underpin mortgage pricing.”Moneyfacts reported earlier this week that the average interest rate on a two-year fixed mortgage in the UK had risen to its highest level since July 2024, while the average rate on a five-year fixed rate mortgage hit its highest level since October 2023. Both were sitting above 5.9%.That could rise further, given that investors are pricing in a 92% chance that the England" class="entity-link entity-organization" data-entity-id="2477" data-entity-type="organization">Bank of England will raise interest rates, from 3.75% to 4%, at its next meeting on 5 November. Markets expect the Bank to institute at least three further rises in 2027, taking the base rate to 4.75% by the end of next year.Threadneedle Street is trying to bring inflation, now at 3.1%, back down to its 2% target. However, it predicted last month that the consumer price index of inflation could rise above 4% in the first quarter of 2027.Nationwide said that across the regions East Anglia posted the biggest hit to house prices, logging an annual decline of 0.7%. Northern Ireland was an exception, experiencing the strongest house price growth at an annual rate of 5.9%.The house price slowdown has improved affordability for some homebuyers, Gardner said.skip past newsletter promotionafter newsletter promotion“Underlying affordability is improving, as house price growth has been well below earnings growth for some time,” he said. “These gains have been only partially offset by higher mortgage rates. This suggests that activity should regain momentum in the quarters ahead, providing the energy shock fades and confidence returns – especially if market interest rates fall back to pre-conflict levels.”Meanwhile, prospective homeowners are preparing for the launch of the government’s Your First Home scheme, which aims to give a helping hand to first-time buyers who do not have the luxury of being able to call on the “bank of mum and dad”.The scheme involves a government-backed equity loan worth 20% of the purchase price, with the buyer only having to put down a minimum deposit of 2.5%. That means the buyer will only need to take out a standard mortgage for 77.5% of the property’s value.The scheme only applies to England and new-build flats or houses. News of its launch has already increased the share price of housebuilders including Persimmon, Barratt Redrow, Taylor Wimpey, Crest Nicholson and Vistry.