Softening base-rate expectations may bring much-needed relief to the market

Declining Bank of England peak-rate expectations, which have fallen from 6.4% in early July to around 5.5% today, could soften damage to the UK housing market caused by high-interest rates, according to Bloomberg Intelligence.

Related topics:  mortgages,  Base rate,  Housing market
Property | Reporter
18th September 2023
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"Once inflation starts easing more markedly, mortgage-rate declines could resume before any central bank cuts, offering respite to the residential property segment"
- Iwona Hovenko - Bloomberg Intelligence

UK housing activity could remain depressed in Q4, reinforcing Bloomberg Intelligence’s (BI) prior view for moderate house-price declines of 5% in 2023.

Barratt, Taylor Wimpey and Persimmon have all flagged falling demand, potentially hitting 2023-24 completions, finds BI analysts. Yet signs of slowing inflation and a softening labour market may curb BOE hikes, likely supporting mortgage-rate cuts and containing market damage.

Iwona Hovenko, real estate analyst at Bloomberg Intelligence, commented: “Elevated mortgage rates may continue to pressure UK house prices in Q4, with moderate declines likely, possibly leading to a 5% fall in 2023, in line with BI’s prior view.

"We expect the slowdown to be more visible in subdued transactions, evident in weak leading indicators such as mortgage approvals, homebuilders' orders, the RICS sentiment survey and property-portal data.

“Broker Hamptons pointed out that homes sold for 98.6% of the asking price in July (98% in July 2019), though 54% went at a discount. Rightmove, Hamptons and Nationwide also flagged strong demand for smaller homes as high rates trim budgets.

"First-time-buyer demand has plummeted, but some wannabe homeowners are still determined to escape the competitive rental market and fast-rising rents. Cash-buyer demand has been the most resilient.”

A 5.5% BOE peak-rate view might trigger cheaper mortgages

Hovenko continued: “Once inflation starts easing more markedly, mortgage-rate declines could resume before any central bank cuts, offering respite to the residential-property segment. Tentative signs of abating price strain and a softening labour market – the unemployment rate climbed to 4.3% in July from the August 2022 low of 3.5%, even as wage growth remained at 7.8% – might support some pullback in rate views, driving mortgage rates lower.

"That may, however, require several months of consistently slowing inflation and wage pressure.”

Despite recent news of lenders paring mortgage rates, financing expenses are still very high and pose a risk to housing activity and prices.

Highest mortgage rates in years drag, despite easing

Though not yet reflected in the Bank of England's August data, mortgage rates started to ease modestly over the summer amid slowing inflation and early signs of a softening jobs market. That said, rates remain at their highest for over a decade, potentially extending pressure on the UK housing market.

Anecdotally, price-comparison websites show the lowest five-year fixed rates on a 75% loan-to-value mortgage dropped to 5.2% in early September from 5.4% a month earlier, yet they are up steeply from the 3.9% recorded four months prior.

The lowest comparable two-year alternatives receded to 5.8% from about 6% in early August but still far exceeded early May’s 4%-plus.

Improving housing affordability could curb price drops

Hovenko added: “The UK housing outlook is still negative for transactions and house prices in Q4 – given mortgage rates remain firmly above 5% across all loan-to-value ratios – but any easing of rates could help avoid the most severe scenarios. That comes as moderate house-value declines, combined with solid annual wage growth of 7.8% in July, potentially improve affordability.

“Even though buyers may not yet feel this effect – since high-interest rates reduce how much they can borrow – a substantial decrease in mortgage rates might make the benefit more pronounced. That said, we don't expect a significant rate fall to materialize in 2023, with the general election (possibly in 2024) posing a threat to housing activity. A modest pre-election housing boost might be possible.”

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