A shift in Bank of England rate-cut expectations has pushed up mortgage rates, after they had eased vs. 2023, which may weigh on housing recovery following an improvement in sentiment, especially in London, according to Bloomberg Intelligence’s latest Housing Pulse.
BI’s report notes that mortgage approvals and private reservations for homebuilders Persimmon and Taylor Wimpey show a rebound is occurring, though demand remains below pre-pandemic levels.
Iwona Hovenko, BI Real Estate Analyst, commented: “Delayed expectations for Bank of England rate cuts remain the main obstacle to a full revival in UK housing, with mortgage rates reversing some early-2024 easing as best-buy five-year fixed-rate deals climbed to 4.2-4.4% vs. 3.9% or less in early 2024. Yet an improvement in the housing sentiment is clear, with activity pickup evident in several leading indicators. We continue to expect low single-digit growth in house prices this year.
“Notably – given an easing house price-to-earnings ratio as income growth outpaces prices – once mortgage rates start ease further, this could also boost mortgage affordability, breathing new life into the housing market. Though such prospects have been pushed back, with current rate expectations suggesting only limited cuts, any shift in views may be a key catalyst.”
Market expectations point to only relatively limited rate cuts in the next three years, says BI, with views for the BOE benchmark falling only to 4.5% by this time next year and about 3.8% by mid-2027. This looks much more hawkish than various economic forecasts for the rate reaching about 4.5% by the end of this year and 3% by end-2025 or mid-2026. A revision to views could provide a key catalyst to the housing market, albeit a seasonal summer slowdown, UK general elections in H2, as well as fragile geopolitics, remain some of the main risks. If BOE rate cuts follow the path expected by the market – with only about 75 bps of cuts in the next year and 125 bps by mid-2026 – this could mean a very sluggish recovery for homebuilders, like Barratt, Taylor Wimpey, Persimmon or Bellway.
Rising mortgage approvals for house purchases suggest a continued improvement in buyer demand, even as March volume was still below the long-term monthly average of about 65,000. Still, a steady, if slow, growth may point to signs of demand recovery. The trend is also seen in the improving private weekly reservations per site of homebuilders Taylor Wimpey and Persimmon, which reported Q1 trading updates in late April. Similarly, their sales rates have been slowly increasing, though they remain below pre-pandemic levels. This may suggest that even as homebuyers are getting used to the high rates, a more meaningful rebound in housing transactions and new-home sales may require a larger decline in mortgage rates. Homebuilders’ volume rebound may also need a regulatory shift and an unlocking of the congested planning system.
Iwona Hovenko, BI Real Estate Analyst, added: “After years of house-price underperformance, the improved relative affordability of London vs. the rest of the UK (even as it remains the most expensive region) may be supporting demand revival in the capital, a potential boost to London-focused Berkeley. That’s especially amid a return to the office, which is again putting more emphasis on shorter commutes. Earlier in 2024, Rightmove and Zoopla have flagged London among the regions most in demand, with Hamptons also noting how the city has been “leading the recovery” this year. Meanwhile, Nationwide stated it had the best house-price growth in UK’s south in Q1. Rightmove’s April data also showed that London homes were selling faster than the UK average (vs. even 10 days longer in the past), with Hamptons noting the steepest drop in the time to sell vs. other regions.”
