House price growth picked up in October, although the squeeze on household incomes is weighing on confidence.
According to the latest Nationwide house price index, annual house prices rose 2.5% in October, up from 2.3% in September.
On a monthly basis house prices went up 0.2%, taking the average price up to £211,085.
Nationwide said that the lack of homes on the market and low mortgage rates were supporting house prices.
Robert Gardner, Nationwide’s chief economist, said: “Low mortgage rates and healthy rates of employment growth are providing some support for demand, but this is being partly offset by pressure on household incomes, which appears to be weighing on confidence.”
Stronger than expected economic growth in the third quarter has increased likelihood of the Bank of England raising interest rates for the first time in more than a decade from 0.25% to 0.50% this Thursday.
The building society said it does not expect a hike to have a significant impact on households due the number of borrowers now taking out fixed rate mortgages.
Gardner said: “The proportion of borrowers directly impacted by a rate rise will be smaller than in the past, in part because the vast majority of new mortgages in recent years were extended on fixed interest rates.
“The share of outstanding mortgages on variable rates – which are therefore likely to see an increase in payments if the Bank Rate is increased – has fallen to a record low of 40%, down from a peak of 70% in 2001.”
According to Nationwide, an increase of 0.25% on an average mortgage would increase monthly payments by £15 to £665 – equivalent to £180 per year.
“That’s not to say that the rise will be welcome news for many borrowers. Household budgets are under pressure from the fact that wages have not been rising as fast as the cost of living. Indeed, in real terms wage rates are still at levels prevailing in 2005,” said Gardner.
Howard Archer, chief economic advisor to the EY ITEM Club, said the outlook for house prices would remain subdued for the rest of the year before rising modestly by 2-3% in 2018.
He said: “The fundamentals for house buyers are likely to remain challenging over the coming months with consumers’ purchasing power continuing to be squeezed by inflation running higher than earnings growth. Additionally, housing market activity is likely to be hampered by fragile consumer confidence and limited willingness to engage in major transactions.
“It is also very possible that a likely Bank of England interest rate hike on Thursday will weigh down on housing market activity. While any increase in interest rates would be small and mortgage rates would still be at historically very low levels, the fact that it would be the first rise in interest rates since 2007 could have a significant effect on housing market psychology.”
