Huge capital appreciation? Don’t believe everything...

On the face of it the latest government figures for house price growth makes comforting reading for investors.

ONS data shows that house prices leapt in July by 15.5 per cent in annual terms, the biggest increase since May 2003.

This represents a sharp jump from June's 7.8 per cent annual rise in prices which was in turn a sharp slowdown from May’s figure.

But analysts are keen to point out that this surge is not what it appears.

Sarah Coles, senior personal finance analyst at business consultancy Hargreaves Lansdown, says this is in fact just the latest step in a house price Hokey Cokey, and is the result of changes to the stamp duty holiday last summer.

“It doesn’t affect the outlook for the market, which is facing real challenges” she insists.

Coles says distortions from the end of the most generous period of the stamp duty holiday last June are playing an enormous role in price rises.

She says there was a burst of demand last June, and people rushed to get sales over the line before the deadline – pushing prices up.

“As a result, we had a lull in July where prices fell back month-on-month and annual rises slowed to 7.1 per cent. We’ll see echoes of this through the next few months, as we get another bump and a dip from the end of the stamp duty holiday in September last year” she cautions.

And she says that although some indicators point to a continued strong market - with an average of 36 properties on each agent’s books, close to an all-time low in the availability of property for sale - the underlying demand is getting weaker.

“It has been falling since May – the longest stretch of shrinking demand since the onset of the pandemic, and mortgage approvals were below pre-pandemic levels. If these trends in demand continue, it’s only a matter of time before we see price rises slow significantly” warns Coles.

And she adds that even the Energy Price Guarantee announced last week by new Prime Minister Liz Truss may not be enough to significantly alter predictions of a property market slowdown.

Coles says: “Even at this level, sky high bills will be a stretch for millions of people, and the relentless rise in the cost of food and other household bills will put us under even more pressure.

“Meanwhile, if the Bank of England raises rates again next week as expected, it’s going to make higher house prices even less affordable. We can expect the maths to stop adding up for increasing numbers of buyers, and their mortgage lenders, which could dampen price rises.

“We’re likely to reach a tipping point if we hit a recession. Growth was flat for the most recent quarter, and lower than expected, so while we haven’t tipped over into a shrinking economy, we may well be on the verge of it.

“High employment levels have been key to the health of the property market, so if jobs become increasingly insecure it could make all the difference.”

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