How Britain’s property market recovery was stopped in its tracks

Woman looking in estate agents window

Interest rates are stalling the housing market, with buyers putting their plans on hold because of rate cut delays, analysis suggests.

Despite inflation falling to the Bank of England’s target of 2pc this week for the first time in nearly three years, rates were held steady on Thursday at 5.25pc, where they have been stuck since August.

This isn’t how it was meant to be. Forecasts at the beginning of 2024 pointed to an expected first rate cut in June. This was then pushed back to August. Now markets believe there is a chance the cut could come as late as November.

This repeated delay has left the housing market “in limbo”, experts have warned. And for those eyeing up their dream home, the effect has been paralysing.

David Hollingworth, of brokerage London and Country Mortgages, said mortgage borrowers had been offered “no relief” by the Bank’s latest decision.

He added: “Mortgage rates have inevitably fed into people’s confidence to move.

“The purchase market has picked up after the most stable mortgage rates for two years. Rates have improved compared to last summer.

“However, there will still be a lot of people holding off buying a house, which is such a big decision.”

Property transactions fell to 77,920 in April, significantly below the 10-year average of 97,914, according to data from estate agents Hamptons.

Lucian Cook, of Savills, points out that these transactions are weighted towards cash buyers and those with a lot of equity. He said: “These groups are less reliant on mortgage debt. They’re insulated from interest rates.

“Mortgage approvals are now up above 60,000 a month, which is still lower than the normal market of 66,000 – you’ve seen mortgage buyers coming back, but it’s still not operating at a fully functioning mortgage market.”

Despite the encouraging headline inflation figure, services inflation currently sits at 5.7pc – above economists’ expectations of where it would be in May. This will continue to put downward pressure on house prices, according to Tom Bill, of Knight Frank.

He said: “House price growth this spring has effectively been squashed by rising mortgage rates and the fact supply is growing faster than demand.

“At the beginning of the year we were expecting five [interest rate cuts] this year – now it’s one, possibly two.

“We’re probably not going to get a cut this summer.

“The housing market is in limbo. It’s looking for something to happen – a rate cut and for the election to be done.”

Rishi Sunak’s decision to call a snap poll may also have contributed to rates staying high. Since the Bank of England was made independent by Tony Blair’s Labour government, it has never changed rates immediately before a general election.

Before the inflation announcement, mortgage rates had been creeping up for several weeks as markets digested the fact that rate cuts were unlikely to come as soon as previously forecast. The average two-year fixed rate is now 5.96pc.

Ironically, when the Bank of England does cut rates for the first time, the impact on mortgage rates is likely to be limited.

Swap rates – the main pricing mechanism for fixed mortgages – have remained steady at around 5.2pc since early May. As they are forward-looking, markets have already taken the future drop into account.

It means that if a rate cut is pushed back further, we could even see mortgage rates increase slightly before the end of the year.

“People are hoping for lower mortgage rates,” Mr Hollingworth said. “But this may or may not transpire, as markets are already pricing in the expectation for the base rate to drop. Fixed mortgage rates are already lower than base rate.”

Rather than slashing the price of homeowners’ mortgages, the first interest rate cut – when it comes – will act more like a confidence boost for an apprehensive market, according to Mr Hollingworth.

He said: “The longer [higher interest rates] go on, people will stop looking back to when rates were at 1pc or 2pc – it becomes the new normal.

“If there’s any improvement from here this will bolster confidence and will boost transactions in the property market.”

The first rate cut will be “vital” to get the housing market moving, Mr Cook said.

He added: “Even if it doesn’t immediately change the headline cost of fixed rate mortgages, it will begin to make it easier for borrowers to meet banks’ affordability tests, which are more closely linked to the rates banks offer when such deals come to an end.”

“An early general election gives more opportunity for the market to gain traction over the autumn months when rate cuts are more likely, underpinning our expectations of low single digit price growth this year.

“The risk is that if those rate cuts are pushed back any further, the window for a pick-up in demand is shortened.”

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