London house prices fall as Bank of England rate hikes loom over mortgage market
Fresh insight into the UK’s lacklustre housing market revealed price declines for London and the South East on Friday, while the overall national rate of increase halved for May
The closely-watched Halifax House Price Index was released with mortgage holders and would-be home buyers eyeing interest rate rises from the Bank of England (BOE).
The turn-around from previous expectations of further cuts from the BOE came amid rising inflation, stoked by higher energy prices following Israel and the US’s war on Iran.
Amanda Bryden, Head of Mortgages, at Halifax, said: “Property price trends continue to reflect the uncertainty linked to developments in the Middle East.
“Despite recent cuts to mortgage rates, higher inflation expectations have kept borrowing costs above the level seen at the start of the year, continuing to stretch affordability for many buyers and temper demand.”
The influential index showed that the average home in the capital cost £534,375 in the month, down 1.5 per cent year-on-year. In the South East region, it was £382,704, down 2.1 per cent.
Nationally, the average price rose by 0.5 per cent, to £298,806. In May last year, it rose 1 per cent.
And City experts have warned that a BOE rate rise cannot be ruled out for the summer.
Borrowing costs
The current base cost of borrowing is 3.75 per cent. The rate of consumer price inflation is 2.8 per cent, above the BOE’s official 2 per cent target and is widely expected to rise further as the energy shock ripples into the data.
The longer the Middle East conflict constrains global energy supplies, the bigger the upward effect on inflation will be. Off the southern shores of Iran, the Strait of Hormuz remains, in effect, closed. The route is usually used by around a fifth of the world’s daily flow of seaborne oil and liquified natural gas.
Rate-setting policy makers will next meet at the BOE on 18 June. The Monetary Policy Committee is expected to keep rates on hold then. But according to analysis from City bank ING, there could be upward action a month later.
“A hike in July is possible if energy flows through the Strait of Hormuz don’t materially – and durably – improve over the next 10 weeks”, said James Smith, developed markets economist.
Any such move would increase the cost of mortgages and home loans which track the bank rate. The house market is highly sensitive not just to the decision made at the BOE, but also the perceived directions of monetary policy.
And so the geopolitical tensions are showing up in the house market, just when it would usually experience a boost around spring and early summer.
Tom Bill, head of UK residential research at estate agent Knight Frank, said: “The seasonal spring bounce in the property market has fallen flat this year. Prices and transaction volumes have been squeezed by higher mortgage rates due to the Middle East conflict.”
Nathan Emerson, the chief executive of Propertymark, the professional body for UK estate agents, agreed:
“Many households are continuing to adjust to higher mortgage repayments and wider cost-of-living concerns.
“Although demand has moderated, the market remains active, where sellers are willing to align pricing with local conditions. Buyers are becoming more selective, and professional guidance is increasingly important in helping transactions progress smoothly.”
Hinging on the Bank of England
What lies ahead for the market will depend on the BOE.
June’s meeting will feed into expectations for any summer hike. It will reveal if more of the nine MPC rate-setters vote for a rise this time around.
The last vote was eight-to-one in favour of no action. Huw Pill, the BOE’s chief economist, was the dissenter, advocating a quarter-point rise to 4 per cent.
ING’s Smith will be watching for a rise in the number of dissenters this month, to shape expectations for July. He identified Megan Greene and Catherine Mann as potential voters for a hike, but he said “Governor Andrew Bailey appears much less convinced”.
And he pointed out that: “Ultimately, central banks must weigh not just the supply chain disruption seen so far, but the risk that disruption persists through the summer and beyond. That’s why we’re not ruling out a July hike if the Strait of Hormuz remains heavily disrupted.”
With the wider property and mortgage sectors keeping watch on Threadneedle Street for signs of policymakers’ intentions, the Halifax’s Bryden said “overall activity has held up well”, adding:
“The housing market remains closely tied to wider global developments, with a return to sustained house price growth dependent on an improvement in the inflation outlook and a fall in mortgage costs.”