Political Divides Widen as Mortgage Rates Rise

UK political battle lines became more defined this week after the Conservative Party declared its intention to scrap the high-value council tax.

Polls underline how difficult it will be for the Tories to win a majority at the next election, but a clear ideological divide is re-emerging in British politics.

The Conservatives are making the case for lower taxes to boost the economy.  Meanwhile, Labour is more focused on the state’s role in driving growth and a need to raise taxes to rebuild financial headroom. Hence the council tax surcharge on homes worth £2 million or more, which we examined last month.

For its part, Reform was slightly less categorical about whether it would abolish the so-called mansion tax. A spokesman told Knight Frank: “Reform is against new taxes in principle, and definitely against new taxes imposed without a mandate. As far as we are aware, a mansion tax was not in Labour’s 2024 manifesto.”

At their party conference in Birmingham, the Tories also announced they would abolish inheritance tax on primary residences, a plan that Paul Johnson, former director of the Institute for Fiscal Studies, said would discourage downsizing.

“No stamp duty when you buy your home, no mansion tax when you live in your home and no inheritance tax on your home when you pass it to your children or grandchildren,” said Tory leader Kemi Badenoch.

Labour’s policy of taxing expensive homes will feel familiar to anyone who has followed UK politics since the global financial crisis in 2007-08. The Conservatives’ openly pro-aspiration pitch based on home ownership feels newer, unless you can remember Margaret Thatcher.

Pressing Issue

As the political sands shift, a more pressing issue for anyone buying or remortgaging is the high cost of borrowing. Rates have climbed since the conflict in the Middle East began in February and sent inflation expectations higher, as we explored here.

The average five-year fixed mortgage rate hit 6% this month, the highest figure since September 2023, according to Moneyfacts.

The data suggests there is pain in the post for the UK housing market. Bank of England numbers show mortgage approvals were 14% below their five-year average in August, while transactions were flat using the same benchmark, according to HMRC. 

Mortgage offers last for up to six months, which means the financial impact of higher rates filters through to the market gradually, indicating that transaction numbers are likely to decline in the final months of the year.

Offers made before the Middle East conflict started have now expired, which helps to explain the assessment by RICS on Thursday that the housing market was losing momentum. The day before, Lloyds reported 0% house price growth in the year to September.

Refined Products

The unpredictable conflict in the Middle East is one topic of conversation in the latest episode of Housing Unpacked with market analyst Michael Brown.

He said inflation concerns are no longer linked to the passage of crude oil through the Strait of Hormuz but more closely tied to a shortage of refined products like diesel.

“Refineries have been running at a hundred percent pretty much everywhere in the world for seven months now, which shouldn't happen,” he said. “The problem the world has at the moment is there is enough crude oil but there's not enough things that we get from crude oil to go round, particularly diesel.”

Based on the latest pricing, for every $5 higher crude oil prices go, the market prices in another 5 basis points of rate increases, Michael said.

He was doubtful about market pricing that suggests the Bank of England would raise rates four or five times by the end of 2027. However, he expected a quarter-point increase to 4% in November, so the UK doesn’t fall out of step with the Federal Reserve or the European Central Bank, which have both hiked this year.

We also discussed this month’s Budget and the recurring set of rumours around which taxes Chancellor John Healey may increase to boost his financial headroom, why the so-called UK “moron premium” has vanished for now and what the key considerations are for anyone currently in the mortgage market.

Country Impact

The impact of rising mortgage rates and political uncertainty is being felt in the Country market, an area that covers a range of urban and rural properties above £750,000 outside London.

Average prices fell 4.2% in the year to September, which was a marginal improvement on the decline of 5% recorded in the year to June.

The number of exchanges in the Country was 2% lower in Q3 this year compared with last year. Meanwhile, the number of offers made was 10% lower.

“Whilst well-priced properties are generating good interest, overall sentiment is brittle due to the uncertainty of what will be in the Burnham administration's first Budget, on top of rising mortgage rates,” said James Cleland, head of Country sales at Knight Frank.

“With concern about which taxes may or may not rise in the Budget later this month, buyers and sellers are struggling to find a steady footing.”