Why January Feels a Long Time Ago for the UK Housing Market

The first annual house price decline since 2023 was reported this week, and it’s unlikely to be the last this year as values continue to drift sideways.

The Lloyds index fell 0.4% in the 12 months to August, having only risen by 1.9% over the last two years. The 1.9% increase also matched the gain recorded over the previous four years, a period during which mortgage rates climbed from their post-financial crisis lows.

As the Middle East conflict has pushed up energy costs and inflation expectations, mortgages have tracked swap rates higher. The average five-year fixed-rate mortgage was 4.8% in August compared to 3.9% in January, Bank of England data shows.

A meaningful return lower for rates doesn’t appear imminent, which will keep a lid on prices.

The flow of oil through the Strait of Hormuz is reportedly about half its previous level thanks to more concerted efforts by the US and its regional allies, said Helen Thomas, CEO of Blonde Money, on the latest episode of Housing Unpacked.

Combined with weaker demand for oil from China and growing efforts to find other ways to export energy from the region, it has kept the inflationary impact of the conflict in check to some extent, she said.

However, she warns that reserves have been depleted and China can’t prevent an oil price spike forever. “I wouldn’t say this is over. It didn’t get worse, but we’re running on very thin margins now and a conflict that is not going to go away.”

More Than Oil

However, the conflict is only one of several reasons the borrowing landscape has become tougher since January. Underlining just how tough, ten-year gilt yields were the highest they have been since August 2007 on Thursday.

A significant shift in the Japanese economy is also putting upward pressure on rates around the world, said Helen.

A period of higher inflation and interest rates is returning after decades of ultra-low borrowing costs in the country, which means more Japanese investors are shifting their attention back home as returns improve. As this major source of demand for government bonds outside Japan recedes, yields elsewhere must rise to attract investors.

This is happening as rising government borrowing to cope with post-Covid debt burdens has boosted the supply of debt and helped fuel an “indigestion problem” in global bond markets, said Helen.

AI Spending Spree

This oversupply is also being exacerbated by AI companies borrowing huge amounts of money to fund their expansion plans.

“What happens if you have too much supply? Well, the price drops, which means the yield goes up,” Helen said.

Governments are also investing more in defence, energy security and making supply chains more resilient. As more debt is issued, upward pressure on yields grows.

The UK has been particularly exposed due to concerns over its public finances, higher energy costs and weak growth outlook, pushing borrowing costs above many other G7 countries.

At the same time, investors are also adjusting to a change of approach from the world’s most important central bank, the US Federal Reserve.

Its new chairman since May, Kevin Warsh, wants to stop spoon-feeding markets via forward guidance, a shift Helen said could push yields higher as investors are forced to price risk for themselves.

Listen to the podcast for the full discussion.

Immediate Consideration

Away from the structural shifts reshaping the global economy and borrowing landscape, a more immediate consideration for the housing market is the Budget on 28 October.

A relative lack of speculation around which taxes could rise has supported transaction volumes this summer, as we explored last week. Indeed, RICS reported “the least negative reading since January” for its net balance of new buyer enquiries in its latest market survey this week.

Chancellor John Healey will avoid anything radical, but the High Value Council Tax bands introduced in last year’s Budget may prove too politically appealing and administratively straightforward to leave untouched, said Helen.

She is less convinced that he will raise capital gains tax or align rates with income tax, a move that would be a further disincentive for landlords, as we explored here.

“It feels like they’ve rowed back from that. They understand, I believe, that the problem is the behavioural response and the fact that it's unreliable how much more money you'd bring in."

One thing is certain - as the Chancellor pulls his plans together, he will be hoping bond markets stay relatively calm and don’t upend his calculations before Budget day.