The summer slowdown deepens

Slow summers aren't unusual in the UK property market, but the surge in mortgage rates since the conflict in the Middle East began has sapped more momentum, raising questions about how quickly activity will recover in the autumn.

UK house prices edged up 0.1% in July, up from June's flat reading, Nationwide reported this morning. That brings the annual growth rate to 1.8%, down from 2.2% a month ago. Transactions have also weakened. The number of sales agreed over the past four weeks fell 9% compared to the same period a year ago, according to Zoopla.

This is largely about borrowing costs, but domestic political uncertainty has had a part to play. Respondents to July's RICS Residential Market Survey consistently cited domestic political uncertainty as a reason buyers were holding back. The government has since ruled out rent controls and an overhaul of property taxes in the upcoming Budget, while reiterating its (increasingly impossible) commitment to building 1.5 million homes during this parliament.

The experience of 2024 and 2025 demonstrated the damage that prolonged speculation over tax reform can inflict on both the housing market and the wider economy. That lesson appears to have been lost on Starmer's team and, despite the recent stamp duty clarification, Burnham risks falling into the same trap. With the autumn Budget still months away, it promises to be a long road.

Higher prices

The Bank of England voted to hold the Base Rate at 3.75% yesterday, in a decision that can be read two ways. On the one hand, three members of the Monetary Policy Committee voted to raise rates to 4%, up from two last month, pointing to rising concerns about the impact of the energy shock the longer it persists.

On the other hand, the Bank is yet to see many worrying signs in the inflation data. The energy shock that began when Russia invaded Ukraine took place during a period of tight labour markets and relatively resilient spending, which fed into higher prices and then wage demands – or what the Bank calls "second-round effects in price and wage-setting." Conditions are different now, and "there is little evidence so far to suggest such effects," the Bank said.

UK inflation has come in below consensus expectations in the last two releases. Meanwhile "loose labour market conditions, and higher interest rates faced by households and businesses than prior to the conflict, will also act to reduce inflation over time," the MPC said. That said, the committee noted that risks to the inflation outlook are tilted to the upside relative to its central projection, which shows the CPI picking up over the rest of 2026 and averaging about 3.2% in Q4.

A meaningful recovery

Investors leaned towards the latter argument as the key takeaway. Investors are still pricing in a rate hike by the end of the year, but that's come down to 29bps of tightening, from 38bps before Thursday's decision, according to LSEG. The probability that hike comes in September fell to 40%, from 50% before the decision. The two-year government bond yield, which is sensitive to BoE rate expectations, fell by the most in two months.

That may lend some stability to mortgage rates, which have risen in the past fortnight amid escalating hostilities between the US and Iran. The cheapest two-year fixed-rate mortgage stood at 4.49% on Thursday, up from about 3.5% before the conflict began. The outlook is highly uncertain given the stop-start nature of hostilities, but we'll need to see fixed rates close to 4% for a meaningful recovery to take hold. 

For a much deeper dive into the economics of the housing market in the weeks ahead, listen to the new edition of Housing Unpacked with our own Tom Bill and financial analyst Michael Brown. They discuss Andy Burnham's first fortnight as PM, plus the latest developments in the Middle East and the implications for oil prices, inflation and mortgage rates. Listen wherever you get your podcasts.

In other news... 

Rayner rejects plans for 3,500 homes, shops and stadium in Kent (Times), and finally, US borrowing costs hit 19-year high as Federal Reserve defies inflation fears (FT),