UK house prices have grown at the fastest rate in 18 months but high mortgage rates mean many prospective buyers still face affordability challenges, Nationwide has said.

The building society said the average house price in the UK was £266,334 across July, up 0.3% on the previous month.

This resulted in an increase in the annual rate of house price growth from 1.5% in June to 2.1% in July, the fastest rate since December 2022.

The previous high came after Liz Truss’s infamous mini-budget during her brief tenure as prime minister, which led to a sharp increase in borrowing rates for buyers.

Robert Gardner, Nationwide’s chief economist, said housing market activity had remained steady in recent months, with about 60,000 mortgage approvals a month.

He said: “While this is still about 10% below the level prevailing before the pandemic struck, it is still a respectable pace given the higher interest-rate environment.”

This week lenders such as Halifax, Natwest and Santander cut interest rates by up to 0.20 percentage points. Last week Nationwide, the UK’s biggest lender, began offering a sub-4% deal for some new buyers.

However, rates are still significantly higher than the period before and just after the pandemic, when homebuyers enjoyed much lower borrowing costs.

Gardner said: “For borrowers with a 25% deposit, the rate on a five-year fixed-rate deal has been about 4.6% in recent months, more than double the 1.9% average recorded in 2019. As a result, affordability is still stretched for many prospective buyers.”

He added that this was expected to improve gradually as wage growth outpaced house price growth and a modest drop in future borrowing costs.

Guy Gittins, the chief executive officer of Foxtons estate agency, said: “Property market momentum has been building steadily so far this year and, despite macro headwinds and the surprise of a snap election, we’re yet to see this momentum show any signs of slowing …

“Buyers and sellers … are adopting a ‘life must go on’ attitude and pressing on with their plans to transact.”

Marc von Grundherr, the director of the estate agent Benham and Reeves, said the fast rate of house price growth demonstrated how much market conditions had improved so far this year, as well as high buyer confidence.