The Nationwide Building Society has reported that UK house prices rose by 0.5% in October.

The annual pace of house price growth continued to moderate in October, declining to 9% from 9.4% in September, the second consecutive month where annual growth has fallen. This is despite the 0.5% October rise.

Robert Gardner, Nationwide’s chief economist, said: “A variety of indicators suggest that the market has lost momentum. The number of mortgages approved for house purchase in September was almost 20% below the level prevailing at the start of the year. Some forward looking indicators, such as new buyer enquiries, suggest that activity may soften further in the near term, especially in London.

“However, broader economic indicators remain positive. The labour market has continued to improve, with the unemployment rate falling to 6% in the three months to August and mortgage rates have fallen back towards all-time lows. Indicators of consumer confidence have also remained close to recent highs.
“If the economy and the labour market remain in good shape, activity is likely to pick up in the quarters ahead providing mortgage rates do not rise sharply.

“An increasing number of borrowers have been opting for fixed rate mortgage deals in recent times. Data from the Council of Mortgage Lenders suggests that around 90% of new mortgages were contracted on fixed rates in recent months, up from 67% two years ago.

“Fixed rate deals are most popular amongst first time buyers for whom certainty over monthly payments is likely to be particularly important (95% of new mortgage lending to first time buyers is currently on fixed rates).

“Borrowers taking out fixed rate mortgages have benefited from historically low interest rates. For example, the average two year fix (for those with a 25% deposit) is currently 2.46%. While this is a little higher than earlier this year, it is still more than one percentage point below the level prevailing in 2012 (see chart below). Moreover, for borrowers with a 10% deposit, the rates available for two year fixes are the lowest on record.

“This has helped, in part, to offset the negative impact of rising house prices on affordability. Indeed, even though house prices are at an all-time high, the cost of servicing a typical mortgage is still close to the long term average as a share of take home pay.

“Despite the high proportion of new mortgage lending on fixed rates, the majority of the stock of outstanding mortgages – around 60% – is on variable interest rates. This is a marked shift from the pre-crisis period where the proportion of mortgages on variable rates was 38%. Moreover, the majority of recent fixes are for relatively short time periods – 62% are for two years and around 30% for five years.

“Nevertheless, the housing market should be able to cope with higher interest rates, provided the increase is gradual 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.”