UK house prices rose for a third month, adding to evidence the market is stabilising in the face of the highest borrowing costs in 16 years, according to one of the top mortgage lenders.

Nationwide Building Society said its measure of house prices grew 0.3% in July, following a 0.2% increase the month before. Economists had expected a 0.1% increase.

“Housing market activity has been holding relatively steady in recent months, with the number of mortgages approved for house purchase at around 60,000 per month,” Robert Gardner, Nationwide’s chief economist, said in a report on Thursday. “While this is still 10% below the level prevailing before the pandemic struck, it is still a respectable pace given the higher interest rate environment.”

Prices are 2.1% higher than a year ago, the biggest annual increase since December 2022, and a sign the market has turned a corner after last year’s mild dip. While affordability remains stretched, buyers were increasingly confident the Bank of England (BOE) would lower its benchmark lending rate from 5.25%, easing mortgage rates.

The average cost of a home is now £226,334 (US$290,560 or RM1.30 million), which is just 2.8% below the all-time record reached in the summer of 2022. Average first time buyers can expect to spend around 37% of their pay on mortgage payments, up from around 28% pre-Covid, Nationwide said.

Keir Starmer’s Labour government, which took office after an election victory on July 4, is determined to boost house building and alleviate supply constraints that have kept prices to levels that are unaffordable for more people. His target is to deliver 1.5 million additional homes within the next five years.

“This combination of factors could lead to a rejuvenation for the housing sector,” said Nathan Emerson, the chief executive officer of Propertymark.

The BOE later cut interest rates to 5% on Thursday. With inflation back at target following a spell of double-digit price increases, policymakers are turning their attention to how to support an economy that fell into a recession last year.

“Just last week, we saw Nationwide introduce the first sub-4% mortgage rate since February, and many are hopeful this could be a sign that the market is about to heat up again,” said Michelle Stevens, a mortgage expert at personal finance comparison site Finder.com. 

Hopes of interest rate cuts have injected confidence into the housing market. Separate BOE figures on Tuesday showed the number of mortgage approvals held steady at around 60,000, close to the strongest level in one and a half years.

“Investors expect the bank rate to be lowered modestly in the years ahead, which, if correct, will help to bring down borrowing costs,” Gardner said. “However, the impact is likely to be fairly modest, as the swap rates which underpin fixed-rate mortgage pricing already embody expectations that interest rates will decline in the years ahead.”

  - Bloomberg