UK house prices are growing at their fastest annual rate for nearly two years as borrowing costs continue to fall on expectations that the Bank of England will keep cutting interest rates, Nationwide has said.

The building society said prices grew by 3.2% in September compared with the same month last year, well above the 2.4% annual growth recorded in August, and the fastest pace since the 4.4% recorded in November 2022.

The average house price across the UK was £266,094 in September – a 0.7% month-on-month increase on August and only 2% below the all-time high prices recorded in the summer of 2022.

Robert Gardner, Nationwide’s chief economist, said: “Income growth has continued to outstrip house price growth in recent months while borrowing costs have edged lower amid expectations that the Bank of England will continue to lower interest rates in the coming quarters.

“These trends have helped to improve affordability for prospective buyers and underpinned a modest increase in activity and house prices, though both remain subdued by historic standards.”

Separate figures from the Bank showed a rise in monthly mortgage approvals to 64,900 in August from 62,500 in July, reflecting an uptick in housing market activity as borrowing costs fall and real wage growth remains resilient.

Net mortgage lending rose to £2.9bn, up by about £100m compared with the previous month.

Borrowing on consumer credit increased from £1.2bn to £1.3bn, in a development that economists said reflected strength in household finances. “[This] remains consistent with our view that consumer spending growth will strengthen over the coming quarters,” said Ashley Webb, UK economist at the consultancy Capital Economics.

The Office for National Statistics said the household saving ratio – a measure of the proportion of disposable income that is not spent on consumption – rose to 10% in the second quarter, up from 8.9% in the first three months of the year.

However, it warned that the UK economy grew by less than it previously estimated between April and June. Gross domestic product increased by 0.5%, down from an initial estimate of 0.6%, after output in manufacturing and construction fell by more than first thought.

Mortgage lenders have been dropping their rates on new product deals in recent months on the prospect of further cuts to the cost of borrowing after the Bank of England reduced its base rate from 5.25% to 5% in August, its first cut since March 2020.

Despite holding rates unchanged at its most recent policy meeting earlier this month, the Bank signalled borrowing costs were “now gradually on the path down” from the highest levels since the 2008 financial crisis.

Lenders such as Nationwide, Halifax and HSBC are now offering five-year fixed rates at below 4% for buyers for the first time since the start of the year.

Banks have also started lending more to borrowers in the last month, with Nationwide announcing last week it would start to offer first-time buyers loans at six times their annual household income. Lloyds and Halifax have recently upped their borrowing limits to 5.5 times household incomes.

The Nationwide figures, which also recorded performance over the third quarter of the year, showed that the increase in house prices in the north of England over that period outpaces those in the south.

The average house price across the three months to September 2024 grew by 3.1% in the north of England year-on-year, compared with 1.3% in the south.

Northern Ireland recorded the biggest increase across the period, with an 8.6% growth in house prices, while Scotland experienced a 4.3% increase. Wales recorded a 2.5% rise.

Terrace houses continued to show the biggest annual increases in prices, with the average cost up by 3.5% in September. The average price for a flat increased by 2.7%.