House prices will grow by 3% this year, despite warnings by the Prime Minister that next month’s Budget will be “painful,” reiterates Knight Frank.

Keir Starmer told the country the economy would get worse before it got better last month — but the property agent’s head of UK residential research Tom Brill says these comments “set a gloomy tone that doesn’t entirely chime with the data”.

The Prime Minister pointed to a £22bn black hole in the public finances, laying the ground for tax rises in the 30 October Budget.

But Brill points to a slew of data last Friday, “which don’t indicate the economy is ailing”.

Average house prices dipped by 0.2% month on month in August to £265,375, the latest index from Nationwide Building Society shows.

But prices were 2.4% higher year on year than last August’s figure of £259,153.

New house purchase mortgage approvals lifted to their highest level in almost two years, up 2.3% to 62,000 in July from a month ago, data from the Bank of England shows.

While residential property sales were up by 7% in July compared to the same month year, with 90,630 transactions, according to HM Revenue & Customs figures.

Brill also points out that the FTSE 100 was trading within 1% of its highest-ever level last Thursday, while business confidence reached an eight-year high in July, according to Lloyds Bank.

The analyst says the Prime Minister’s comments may serve to talk down the housing market.

Brill says: “Talk of a ‘painful’ Budget may cause a degree of hesitation among buyers and sellers, together with the fact more of them will continue to roll onto less favourable mortgage deals.

“Such speculation is already dampening demand in higher-value markets, thanks to the combination of VAT on private school fees and uncertainty surrounding changes to capital gains tax, non dom rules, pension tax relief and inheritance tax.”

The number of UK exchanges rose by 6% versus the five-year average in July, but there was a 12% fall among homes above £2m, according to the property agent’s own data.

Brill says this “highlights a conundrum for the new government two months ahead of its first Budget”.

He points out that although £2m-plus home sales represented 6% of all transactions in the year to March 2023, they accounted for 22% of the £11.7bn raised in stamp duty.

“When introducing tax changes, the government will need to tread carefully to ensure new black holes don’t start appearing,” says Brill.