After almost three years of economic woes, things are finally beginning to ease. Leading the positive news is last week’s announcement that the Bank of England (BoE) has cut interest rates for the second time this year, as expected.
As of 7th November, Policymakers at the BoE have opted to reduce interest rates to 4.75% down from the 5% introduced in August this year. And the good news continued, with the BoE governor Andrew Bailey suggesting it was “likely that interest rates will continue to fall gradually from here”.
So far, so positive. But what can we take from this news? Are we about to see a sudden spike in activity? How will the property industry as a whole react to the rate cut?
How is the property industry reacting?
It would be wrong to suggest that the BoE’s announcement took the industry by surprise. Indeed, many experts have been predicting further rate cuts since the news in September that UK inflation had dipped below 2% for the first time in three years.
Unsurprisingly, the industry’s reaction has been largely positive. Many conveyancers have expressed hopes that cuts will provide some long-overdue relief to borrowers, especially those who’ve suffered the last few years on variable-rate mortgages. There’s also real positivity around the prospect of heightened market activity from those looking to purchase or refinance property – providing the market with a pre-Christmas shot in the arm.
As Richard Donnell, executive director at Zoopla, told Property Industry Eye,“The decline in the base rate is already being factored into lower mortgage rates which have reached a two-year low over the autumn. Lower borrowing costs are expected to support buyer demand and sales into 2025.”
Let’s look a little more closely at market activity.
What does it mean for market activity?
It’s one of the property industry’s longest-held maxims that interest rates are one of the most important factors in purchasing decisions. Generally, lower rates attract more borrowers and prices tick up as demand grows accordingly.
The rate cut has arrived as the market had already tentatively begun to recover. The latest available data shows that mortgage approvals increased for the fourth consecutive month in September, hitting 65,647, figures not seen since August 2022. This is coupled with increased activity from first-time buyers, with 33% of all transactions this year coming from them.
As a result, we expect the rate cuts to help drive further activity, as those buyers who were previously hesitant to commit flood the market. This is even more likely when you factor in the upcoming stamp duty changes in April 2025. The measure is especially hard on first-time buyers in sought-after areas, with the no stamp duty threshold dropping from £425,000 to £300,000. It should drive a flurry of activity for the rest of this year and into the opening months of 2025 as buyers look to beat the 1st April Deadline.
What about the longer term? Well, it’s dependent on what happens to the wider economy and whether interest rates continue to fall, but the portents are promising. According to the OBR, quarterly property transactions should reach 350,000, up from the 275,000 per quarter predicted in March 2024. This is echoed by predictions that we could see 1.2 million transactions in 2025, up from the 1.1 million projected for this year.
What will this mean for house prices?
Much like transactions, there is cautious optimism that 2025 could see price growth. We covered what is going to happen to house prices next year in more detail earlier this month. However, it warrants another mention here.
Following the interest rate cuts, analysts within the industry have become decidedly more chipper on prospects for 2025. Savills five-year mainstream house price forecast expects house prices to increase by 4% in 2025. This is a marked upgrade from the firm’s previous prediction of 3.5%.
Savills also expects consistent year-on-year growth for the five years to 2029. Having predicted a five-year growth figure of 17.9% earlier in the year, the estate agent is now forecasting 21.6% (or £84,000 on average).
What’s more, Savills isn’t the only one optimistic about prices in 2025. As early as August this year (when the first rate cut was announced) Capital Economics was predicting 5% growth in 2025. The economic forecaster believes that rates could drop below 4% by 2026, helping to drive further demand even after the SDLT deadline.
A Note of caution
Despite all the positives, there are a couple of things worth keeping an eye on. The first is that decelerating wage growth remains a huge problem for the UK economy, as are continually rising consumer prices for goods and services. Both could act as a drag on the property market as potential homebuyers struggle to make ends meet.
The second elephant in the room is uncertainty. Despite the positivity prompted by the rate cut, we remain in precarious times. Nobody yet knows what a second Donald Trump presidency means for the global economy, particularly if he makes good on his commitment to reintroduce trade tariffs.
Likewise, the fiscal loosening outlined in the government’s budget last week may lead to a minor rise in inflation. The OBR predicts that budget policy measures could increase inflation by 0.4% at their peak effect in 2026. This would make further rate cuts less likely.
For the cut to truly stimulate the long-term health of the market, it needs to be the first step in a downward trend. Mortgage lending relies on the market’s confidence in rates over a three to five-year period. Uncertainty dents that confidence.
None of this is to say that interest rate cut isn’t positive news and shouldn’t be received as such. However, it’s advisable to keep your optimism cautious for now.
