What’s really behind the surprise surge in house prices?

After the fastest growth in two years, the cost of the average home – up 3.7 per cent in a month – is now close to an all-time record. But, first-time buyers aside, is it such bad news, asks James Moore

Sorry to make a soggy start to the week even more miserable, but it brings bad news for homebuyers. The housing market has taken a shot of adrenaline and performed a season’s best in the high jump.

Building society Nationwide reported a November surge in the annual growth rate to 3.7 per cent, from 2.4 per cent in October. Prices are now rising at the fastest clip since November 2022. With the monthly increase standing at 1.2 per cent, the cost of buying a home is now within a hair’s breadth (1 per cent) of its all-time peak.

The average price now stands at £268,140, which compares to a median average annual income of just below £38,000. It seems all but certain that new records will be set in the new year, if not before.

Nationwide recently trumpeted itself as the “first major lender to offer first-time buyers [the] ability to borrow six times income, up to 95 per cent loan-to-value”.

There’s nothing like the UK housing market to age you. When my partner and I stepped onto the ladder, it topped out at 3.5 times, a maximum we didn’t want any part of. Conservative financial choices like that aren’t easily available today. If Nationwide, which is about as far from being a cowboy lender as it is possible to get, is the first to offer this sort of loan, it surely won’t be the last. This is the inevitable result of prices shooting for the moon.

“The acceleration in house price growth is surprising, since affordability remains stretched by historic standards, with house prices still high relative to average incomes and interest rates well above pre-Covid levels,” said the society’s chief economist Robert Gardner.

So what’s going on? Some would point to people sitting on their hands before a tax-raising Budget, but that doesn’t appear to be the case. Gardner says that “the majority of mortgage applications” fuelling these figures “commenced before the Budget announcement”.

What we do know is that the market has been resilient of late. So this may simply be a case of it picking up speed and of people taking the plunge because they fear future rises. Renting is a fairly miserable experience at the best of times and prices in the private rented sector have also been rising at a rapid rate. If you can, if someone will lend you what you need, it makes all kinds of sense to escape it.

It doesn’t hurt that while the economy is sluggish, it is still growing. True, the labour market is not as friendly as it was. Job vacancies have been declining for a long time – the most recent labour market survey from the Office for National Statistics (ONS) reported the 28th consecutive fall. Unemployment – at 4.3 per cent – has also been on the rise.

However, even with all this, it’s still pretty good out there by historic standards. And wage growth averaging 4.8 per cent per the most recent official figures, is still outpointing both house price growth and overall price inflation, mitigating the impact of much higher mortgage rates than was the case a couple of years ago.

Another important point raised by Gardner is that “household debt levels [are] at their lowest levels relative to household income since the mid-2000s”.

With all that being the case, is this result really a surprise? Most of the necessary fuel to light a fire under the market is there. And I suspect there will be more to come when potential purchasers digest things such as the impending rises in stamp duty due in April and rush to get in ahead of the deadline.

“With the current level of buyer activity expected to continue well into the new year, we predict London properties to hold their value or see a gradual value increase of up to 3 per cent over the course of next year,” said Matt Thompson, head of sales at estate agency Chestertons.

Thompson is closer to the ground than I am, but that number looks conservative to me. It’s certainly a good time to be in his line of work.

Is there any relief to be had for people looking at the current prices with something close to horror? I wish I could offer some. However, this looks set to continue unless and until Britain starts building a sufficient number of homes to cater for the demand that is clearly out there. A lot is thus riding on Angela Rayner, the deputy PM, who is spearheading the government’s plans to get Britain building.

The government’s approach is the right one. But as I’ve written, there is trouble coming if plans to tear up the red tape gumming a sclerotic planning system leads to more building on flood plains or to the creation of vast, soulless dormitory estates where people don’t want to live. Rayner simply has to get this right.