Bloomberg Intelligence’s UK Housing Pulse, July 2023: Turbulence ahead even as rates ease

UK house prices and transactions may keep softening as long as mortgage rates remain above 5%, posing a threat to sales and profit of Persimmon, Barratt, Taylor Wimpey, Bellway and Berkeley, finds Bloomberg Intelligence’s (BI) latest UK Housing Pulse.

That said, BI analysts say that early signs of a very modest decline in UK mortgage rates could offer some respite to the domestic housing market. BOE peak-rate views have declined 70 bps from recent highs amid tentative signs of slowing inflation.

Lower BOE Peak Rate Could Ease UK Housing Headwinds

Declining BOE peak-rate expectations – now about 5.7% vs. 6.4% just weeks earlier – may limit the damage from high interest rates to the UK housing market. Yet once inflation starts easing more markedly, those forecasts could potentially moderate further, offering the UK housing market a respite.

Iwona Hovenko, real estate analyst at Bloomberg Intelligence, commented: “Tentative signs of easing cost pressures, with inflation slowing more than anticipated and the labour market also softening – as unemployment unexpectedly increased in June – could support some pull-back in rate views, in turn driving mortgage rates lower. This may, however, require several months of consistently slowing inflation and wage pressure. Despite recent news of mortgage-rate cuts by lenders, financing costs remain high and still pose a significant risk to housing activity and prices.”

Soaring Rates May Have Hit Fragile Housing Sentiment

Recent sharp mortgage-rate hikes may hit UK housing sentiment, especially given a fragile rebound from post-mini-budget lows in Q4.

Hovenko, added: “Though BOE data for June doesn’t yet reflect the latest steep increases, anecdotally, price-comparison websites show the lowest five-year fixed rates on a 75% loan-to value (LTV) mortgage soared to 5.44% in early August from about 3.9% three months earlier, with some of the biggest spikes coming in days. Comparable lowest two-year fixes surged to about 6% from a little more than 4% at the beginning of May.”

Though surging rates may add urgency for buyers who have already secured a more-attractive mortgage offer, other house hunters may delay purchases until rates fall and housing-market headwinds ease. Such a rapid jump in rates may have particularly hit homebuyers heavily reliant on debt.