UK Housing Market Gains Cloud Over As Rate Cut Expectations Fade

The recent recovery in the UK housing market could be short-lived, according to a Bloomberg Economics report. The analysis suggests that a shift in investor sentiment regarding interest rate cuts by the Bank of England (BOE) poses a threat to the upward trend in house prices.

Earlier this year, hopes of significant rate cuts fueled a surge in buyer demand. Cheaper borrowing costs made homeownership a more attractive option for many. Data from Rightmove, an online property portal, indicated the strongest rise in asking prices in a year for April [source]. Surveyors also reported growing optimism about new buyer interest.

The outlook has become clouded by recent pronouncements from BOE officials. Their warnings about persistent inflationary pressures have caused investors to scale back their expectations for rate cuts. At the beginning of 2024, traders were anticipating as many as six quarter-point cuts throughout the year. This has now been revised down to just two cuts.

Bloomberg Economics predicts a decline in interest rates to 4% by year-end, lower than the current 5.25%. This suggests a steeper fall in mortgage rates than currently priced in by the market. Despite this, the report’s author, Niraj Shah, highlights the potential dangers: “The housing market is at a delicate juncture. If the recent reevaluation of the interest rate outlook holds true, then housing demand could be negatively impacted, raising the risk of a reversal in the recent house price recovery.”

Even if prices remain stable, affordability could become a significant concern. Bloomberg Economics estimates that a larger portion of household income would be dedicated to mortgage payments compared to the pre-2007 financial crisis period. This is in contrast to earlier forecasts suggesting mortgage affordability metrics would improve.

The report acknowledges that some lenders are introducing measures to aid buyers in managing costs, such as accepting smaller deposits. However, the overall conclusion is that the recent rise in swap rates, which influence mortgage products, presents a risk to the housing market’s stability.


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