House prices have hit two-year high – but there is trouble brewing in the market

The housing market is getting toasty. The latest figures issued by lender Halifax found prices increased by 0.3 per cent in August, bringing them to a two year high. The average property now goes for £292,505 compared to £291,585 in July.

Those numbers make for painful reading when you consider that the average wage in this country is a shade below £36,000. Nonetheless, Amanda Bryden, head of mortgages at Halifax, used words like “positive” and “optimism” in her comments – mainly thanks to the impact of lower borrowing costs.

“Prospective homebuyers are feeling more confident thanks to easing interest rates. That optimism is reflected in the latest mortgage approval figures, now at their highest level in almost two years,” she said. The recent price rises, she added, “build on a largely positive summer for the housing market”.

At 4.3 per cent, the year on year growth in August was the fastest for 18 months. That figure does need to be viewed with a little caution given the market often takes a nap in August when much of Britain takes holiday. It did that last year. This year, not so much, which helps to explains the punchy number.

Needless to say, estate agents were purring. Guy Gittins, the CEO off Foxtons, said: “We’re seeing more enquiries and more offers made, with buyers also acting with greater confidence since interest rates were cut at the start of the month. All in all, the outlook remains a positive one for the remainder of the year and we expect a strong level of activity to persist as we move into autumn.”

Love them or loathe them, you’ll be seeing more of those bright green minis emblazoned with the company’s yellow logo plying the streets of the capital.

Both were right to cite the influence of the Bank of England’s first rate cut on the market. The price of the two and five year fixed rate home loan deals that most buyers favour are not directly linked to Bank base rates – they are instead priced off the City’s interest rate swaps market which is driven by the market’s expectations over the future of rates.

But the Bank’s historic cut has driven City hopes of further reductions. This has helped to bring mortgage prices down. Cheaper mortgages help buyers. More buyers increase prices. Bryden says affordability “remains a significant challenge for many potential buyers still adjusting to higher mortgage costs”. Even though mortgage prices have been coming down, they are far higher than they were a couple of years ago.

The other big factor creating problems for buyers is the shortage of supply. The government has promised 1.5m more homes over the course of the current parliament, touting a promise to “get Britain building again”. It needs to get moving.

Barratt Developments, Britain’s biggest house builder, this week reported a big drop in profits after it completed just 14,000 new homes, more than 3,000 fewer than it had the previous year.

Could the Bank offer hard-pressed buyers a further helping hand at the end of the month? The City, which has tended to take a more optimistic view than I do, rates the chances at a little less than fifty fifty.

Inflation ticked up to 2.2 per cent in July after two months at the Bank’s 2 per cent target. The modest increase was expected. The chief downward force on the headline rate has been energy prices, which have declined markedly since the peak recorded in the summer of 2023, but the subsequent decline from that level is starting to fall out of inflation calculation.

Fortunately, other sectors have picked up some of the slack. It is also notable that while headline inflation rose, core inflation, which excludes energy as well as the other volatile components such as food and tobacco, fell to 3.3 per cent from 3.5 per cent. Service price inflation, which has been worrying the Bank, also declined, to 5.2 per cent from 5.7 per cent.

Bank governor Andrew Bailey said that he thought longer term inflation pressures were easing when he made a speech in the US towards the end of last month. However, he said it was too early to declare victory and that the Bank would be “careful not to cut interest rates too quickly or by too much”. Remember too that the vote to cut last time was on knife edge – it went five to four in favour. Such a level of disagreement on the rate setting Monetary Policy Committee (MPC) has been quite rare in recent teams.

There is another set of inflation data due before the next meeting, which will have a role to play in the MPC’s decision making. But bearing in mind the previous vote and Bailey’s comments, I think it sits on its hands. Britain’s prospective home buyers will have to wait for their next shot in the arm.