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UK house prices stagnate as inflation and interest rate hikes hit

UK house prices stalled in September. Photo: Nathan Stirk/Getty
UK house prices stalled in September. Photo: Nathan Stirk/Getty

UK house prices saw no growth for the first time in more than a year in September, highlighting the growing risks to the property market as Britons brace for a sharp increase in the cost of borrowing.

The Nationwide House Price index showed that the average property price was unchanged between August and September, ending more than a year of uninterrupted growth. Prices saw a 0.7% monthly increase last month.

The average house price this month stood at £272,259 ($304,600) across the UK, Nationwide Building Society said. Annual growth cooled to 9.5% from 10% – the weakest since April 2021.

Read more: How a sinking pound will inflate mortgage debt for millions

Additional signs of a slowdown in the market have emerged over the past month, Robert Gardner, Nationwide’s chief economist warned.

"There have been further signs of a slowdown in the market over the past month, with the number of mortgages approved for house purchase remaining below pre-pandemic levels and surveyors reporting a decline in new buyer enquiries," he said.

"Headwinds are growing stronger" and "housing affordability is becoming more stretched" as high inflation squeezes household budgets with mortgage rates soaring "significantly", he added.

Following years of growing prices, Britain's red hot property market is now under serious threat as the prospect of surging interest rates in response to the biggest tax cuts in 50 years spooks buyers.

Read more: How four days of market chaos has impacted UK household finances

The Bank of England has been on a consistent path to bring 40-year high inflation back to its 2% target. Prices were running at 9.9% in August, slightly down from the record high of 10.1% the month before.

Threadneedle Street hiked the key rate by 0.5% to 2.25% last week, forecast to peak at 6% by 2023.

Mortgage lenders have also been withdrawing loan products and dramatically pushing up rates as a result of chancellor Kwasi Kwarteng's mini-budget last week, which has seen the pound tumble to record lows and created chaos in the bond market.

The move is expected to eclipse the boost from a cut in stamp duty tax on house purchases, which was part of the government's £45bn of unfunded tax cuts.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: "There were already gathering clouds in the property market, with surveyors saying fewer people were house hunting and buyers were losing confidence.

"However, the storm broke this week, with around 40% of mortgages being pulled from shelves, because the pace and scale of the collapse in the bond market meant it was impossible to sensibly price them.

"When the dust settles, and lenders come back to the market, we can expect eye-watering rises in interest rates."

Despite this, mortgage approvals rose to 74,340 last month, from 63,740 in July and the highest reading since January, according to BoE data.

"The sharp jump in mortgage borrowing in August and corresponding rise in mortgage approvals is a sharp contrast to the chaos currently engulfing Britain’s property market," said Alice Haine, personal finance analyst at DIY investment platform Bestinvest.

Watch: How does inflation affect interest rates?