British house prices under threat if interest rate cuts delayed

Even if prices stay unchanged, households would still be spending a higher share of their incomes on mortgage payments than they did in the decade to 2007, Bloomberg Economics calculated. 

The British housing market recovery is threatened by investors scaling back bets on how far the Bank of England will cut interest rates, according to a new report.

The property market has turned a corner this year as cheaper borrowing costs lure prospective buyers. 

Home asking prices rose the most in a year in April, according to data from online sales portal Rightmove, while surveyors are becoming more optimistic about new buyer demand.

But a Bloomberg Economics analysis suggests the recovery is now in question as Bank of England officials warning of lingering price pressures have pushed up two- and five-year swap rates, used to set the bulk of mortgage products. 

Elevated mortgage rates could keep owning a house out of reach for many. 

Even if prices stay unchanged, households would still be spending a higher share of their incomes on mortgage payments than they did in the decade to 2007, Bloomberg Economics calculated. 

That’s in contrast to earlier this year when that metric was set to fall below pre-financial crisis levels.

“The housing market is at a delicate moment,” said economist Niraj Shah. 

“Should the recent re-appraisal of the rates outlook prove correct, housing demand would take a hit, raising the risk that the recent recovery in prices goes into reverse," he said.

Traders, who were pricing in as many as six quarter-point cuts in 2024 at the start of this year, now expect just two after Bank of England policymakers warned of persistent price pressures while UK and US inflation came in hotter-than-expected.

Bloomberg Economics still sees British interest rates declining to 4% by the end of the year from the current 5.25%, which would imply a sharper fall in mortgage rates than currently indicated by markets. 

Also, more lenders helping buyers manage costs, for example by requiring smaller deposits, could drive up demand and support prices.

“For the time being, we treat the recent spike in swap rates as a risk,” Mr Shah said. 

“We think the UK’s inflation outlook is diverging from the one in the US as easing cost pressure allows the Bank of England to cut by more than markets expect.” 

Meanwhile, the European Central Bank cannot commit to what will happen after a likely first reduction in borrowing costs in June, according to Governing Council member Joachim Nagel.

If data until the next meeting in six weeks increase confidence in reaching the 2% goal, “I would be in favour of a rate cut in June,” the Bundesbank president said. 

“However, such a step would not necessarily be followed by a series of rate cuts.” 

Mr Nagel is among the more cautious officials supporting the beginning of monetary-policy easing in June, but calling for prudence when it comes to following moves. 

• Bloomberg