Green shoots of recovery for UK house prices

Last year proved difficult for the UK property market. House prices stagnated, falling by around 2 per cent in the year to November, as the chart below shows. Looking at mortgage rates, it's not hard to see why: the average rate for a two-year fix peaked at an eye-watering 6.11 per cent in July last year. Affordability for first-time buyers was stretched, while borrowing more to move up the property ladder looked like an unappealing prospect. 

But housing market data points in 2024 have brought good news so far. The latest Bank of England (BoE) data showed that the rate on newly-drawn mortgages fell by 6 basis points to 5.28 per cent in December – the first drop since November 2021. House prices seem to be stabilising, too. According to the latest Halifax House Price Index, prices are now 2.5 per cent higher than a year ago, having risen 1.3 per cent in January alone. With rate cuts on the horizon, are we seeing the green shoots of recovery in the UK housing market? 

A lot will hinge on how mortgage rates move this year. Fixed-rate mortgage deals depend on swap rates, which reflect financial markets' expectations of where interest rates will go next. The good news is that the BoE is widely expected to start cutting rates towards the middle of the year – and this is already feeding into lower fixed-rate deals. The bad news is that expected cuts are already ‘priced in’. This could mean we don’t see any further reductions until rate cuts actually take effect. 

Matters are also complicated by the fact that mortgage rates aren’t only a function of interest rate expectations. Rachel Springall, finance expert at MoneyFacts, points out that “lenders can pull deals if they have an influx of applications, and a volatile swap market can put pressure on pricing where margins are already tight”. She thinks that we will see a mix of fixed-rate rises and cuts over the months ahead, as lenders juggle both consumer demand and future rate cut expectations. 

Many borrowers have so far been insulated from higher rates, thanks to cheap fixed-rate deals secured before interest rates started rising. And, as they refinance, they will face significantly higher rates than before: according to the BoE, the rate on the outstanding stock of mortgages increased by 9 basis points to 3.36 per cent in December. 

Yet the total cost of household mortgage payments is probably nearing its peak. Analysts at Capital Economics forecast that by the end of 2024, households renewing two-year fixes will be refinancing onto a lower rate. Their calculations suggest that rate cuts in June could see two-year fixes drop from about 4.6 per cent to 3.8 per cent by the end of the year. This could release significant pent-up demand – giving house prices some momentum over the second half of 2024.  

There might be the odd bump in the road in the meantime. Economists at NatWest think that increased saving and cautious borrowing could see house prices dip by another 2.4 per cent over the months ahead. But they note that this is “by any yardstick, a benign correction” and would leave prices about where they were in the final quarter of 2021. It now looks unlikely that prices will fall much further than that. 

Payment arrears are still low, especially compared with after the financial crisis. Take-up of the government’s ‘Mortgage Charter’ (which allows borrowers to extend their mortgage terms or switch to interest-only payments) also remains very limited, suggesting low levels of mortgage distress coming down the pipeline. NatWest says that UK’s constrained housing supply could ultimately keep a ‘floor’ under house prices, and that “the tail risks of a more acute downturn with a spiral of forced selling and negative equity are low”.