UK housing data exceeded analyst expectations this week. In the first quarter of 2019, the Halifax House Price Index reported average UK property prices increasing 5.0% year-on-year. The increase was better than the 4.5% forecast. The average house price in the UK is now £236,619.

Year-on-Year Change in Quarterly House Price Data – April 2018 to April 2019

Source: IHS Markit, May 2019

The chart above shows that recent house price growth has been relatively uninspiring. However, this is pitched against a backdrop of very poor sentiment generated by the UK’s vote to leave the European Union. The jump we see taking place now is more reassuring and, importantly, is accompanied by a pick-up in the number of house transactions taking place. Activity measured by completed transactions is 6.8% higher year-on-year.

Another way to evaluate the future health of residential property is to look at mortgage approval rates, which act as a leading indicator. According to recent data, mortgage approvals have risen by 4.1%.

There are several reasons for why stable house prices matter. Rising property values generate what economists term a ‘wealth effect’. This happens when individuals’ assets appreciate making householders feel more comfortable financially and, therefore, more willing to spend on goods and services. Coupled with an expanding population, rising wealth becomes a key driver of economic expansion. This helps future employment prospects, fuelling improvements in real living standards.

However, a rise in property prices can be a hurdle for first time buyers, or those looking to move from existing properties into bigger ones. One way to offset the pressure from this is wage growth. Post the financial crisis house prices have risen but wage prices have not kept pace. Thankfully, financial costs of servicing mortgages have fallen and the latest reported data on wages demonstrates average wages improving which also helps with affordability. Average wages rose by 3.5% in the three months to the end of February, well ahead of inflation which currently sits at 1.9%.

For the UK Treasury a rise in property prices, coupled with an increase in property transactions taxes (stamp duty), brings a tax bonanza. This supports future government investment and spending and helps reduce the fiscal deficit.

What about the future? Forward looking estimates by industry analysts remain very upbeat. Even factoring in a range of Brexit scenarios average house prices are expected to move higher – research conducted by online agent Yopa suggests this could be pushed up to £238,000 by the end of the year. Good news for existing home owners and some relief too for job holders looking to leap into the property market.

Your capital is at risk. Investments can fluctuate in value and you may not get back the amount you invest. Past performance is not a guide to future performance. Tax rules can change at any time.

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