Nationwide have just released their HPI for October.
- House prices increased by 0.6% in October
- Annual house price growth ticked up to 3.9%
Commenting on the figures, Robert Gardner, Nationwide’s Chief Economist, said:
“UK house prices increased by 0.6% in October, with the annual pace of price growth edging up to 3.9% from 3.8% in September.
“Over the past five months annual price growth has remained in a fairly narrow range between 3% and 4%, broadly consistent with earnings growth over the longer term. While this bodes well for a sustainable increase in housing market activity, much will depend on whether building activity can keep pace with increasing demand.
Fixed rate mortgages remain most popular
“Fixed rate mortgages have remained the most popular product type by a considerable margin in recent years. Data from the Council of Mortgage Lenders suggests that almost 90% of new mortgages were contracted on fixed rates over the past twelve months. This is probably a reflection of ongoing uncertainty about the precise timing of UK interest rate increases as well as a desire to lock in low interest rates.
“The proportion of new mortgage lending contracted on fixed rates has been steadily increasing since the low point in 2010, when less than half of lending was on fixed rates. In recent months the proportion of lending accounted for by fixed rate deals has surpassed the levels prevailing before the financial crisis.
“Fixed rate deals are most popular amongst first time buyers for whom certainty over monthly payments is likely to be particularly important. Indeed, over the past twelve months 95% of new mortgage lending to first time buyers was on fixed rates.
“Borrowers taking out fixed rate mortgages have benefited from historically low interest rates. For example, in September the average two year fix (for those with a 25% deposit) was 1.91%. While this is a little higher than the rates prevailing in the summer, it is almost two percentage points below the level prevailing in 2012 (see chart below). Moreover, for borrowers with a 10% deposit, the rates available for two year fixes are currently the lowest on record.
Will the market cope with higher interest rates? “As a result of the popularity of fixed rate mortgages in recent years the proportion of outstanding mortgages on variable interest rates has declined steadily, from almost 70% in mid-2012 to almost half in mid-2015. This should help to insulate many households from the impact of higher interest rates, though the proportion on variable rates is still higher than the 38% prevailing in 2007. It is also important to note that the majority of recent fixes are for relatively short time periods – 65% were for two years and 30% for five years.
“Nevertheless, the housing market should be able to cope with higher interest rates in the year ahead, provided the increase is modest and the economy and the labour market remain in good shape. Guidance from the Bank of England suggests that the increase in interest rates is likely to be gradual, and that they are expected to settle at a level somewhat below the average prevailing before the financial crisis, which should help ensure borrowing costs remain manageable.”