UK housing, a snapshot

UK housing, a snapshot

We have been pondering the forces at work in the UK housing market. Here are six developments that we think warrant attention.

• First, house prices have held up in the face of rising interest rates. The Bank of England raised rates from 0.1% in late 2021 to a peak of 5.25% in 2023, the highest since 2008. But rather than falling, as was widely expected, house prices have risen by 10% since late 2021. (This has not been enough to keep up with inflation, which rose 21% over this period, but it’s a stronger performance than was seen in the wake of previous aggressive interest rate raising cycles.) Why have house prices held up? Most households have fixed-rate mortgages which, unlike the variable-rate deals that were the norm until the 2000s, delay and spread the impact of rising interest rates on mortgage payments. More stringent regulation of mortgage lending that was put in place after the financial crisis means that borrowers are better placed to cope with higher mortgage rates. Consumers have also drawn down on savings built up during the pandemic, enabling them to offset some of the cost of higher mortgage rates. Most importantly, unemployment has remained low and wage growth has proved stronger than expected.

• Second, house prices in London and the south have underperformed the rest of the UK in the last couple of years. House prices in the South East, South West and London have fallen by 1%-2% since early 2023 while prices in Northern Ireland, Scotland, Yorkshire and the Humber, the North West and North East have risen by 6%-14%. This reverses the trend of outperformance by the south that had been in place since 2010. Higher interest rates have hit southern households which tend to have larger mortgages relative to their incomes. This has squeezed housing activity and prices most in areas with the highest house prices.

• Third, the pandemic's ‘race for space’ that led buyers to opt for larger properties seems to be unwinding. The FT reports that nearly 20% of the homes on the market so far this year were purchased in 2021 and 2022, well above the 12% share that homes owned for three and or four years normally account for.  Lucian Cook, Savills’ director of residential research, says that return to the office mandates and the realities of long commutes mean that moving further from work has become a more daunting prospect. 

• Fourth, more people own their homes outright, but fewer have mortgages. Most of the large cohort of households that bought property in the 1980s and 1990s have paid off their mortgages,  lifting the proportion of the adult population who are outright homeowners from 25% in 2000 to almost a third today. Meanwhile the inflow of people into home ownership has slowed. High house prices and tougher criteria for mortgage lending mean that the proportion of adults with a mortgage fell from 36% in 2000 to 24% in 2023. As a result more people are renting, and over half of those aged 19-29 live with their parents.

• Fifth, mortgages are getting longer. 25-year mortgages were once the norm. Today half of new borrowers take on a mortgage with a term of 30 years or more, up from just 12% in 2005. New mortgages with terms of 40 years or more, which were almost unknown at the turn of the century, now account for just under 10% of new mortgage lending.

• Sixth, mortgage rates are at their lowest level for nearly three years. The average two-year mortgage rate fell below 5.0% for the first time since September 2022 last week, having been close to 7.0% in 2023. The Bank of England has cut interest rates from 5.25% to 4.0% in the last year and mortgage rates have drifted lower in response. This is good news for new buyers. However, just as fixed-rate mortgages delay the transmission of rising interest rates to mortgage payments, so they slow the pass through of interest rate cuts to existing mortgage holders. The Bank estimates that due to lags in mortgage refinancing, reflecting the length of fixed-rate deals, many borrowers will see their mortgage rates rise when they refinance. Thus, despite interest rate cuts, the average mortgage rate paid by UK households is set to rise, not fall, over the next 12 months.

PS: Last week’s briefing concluded that tariffs are yet to fully feed through to US businesses and consumers, with a more complete picture likely to emerge in the coming months. In the meantime, three additional points warrant consideration. 

First, Mr Trump’s executive order to extend the tariff truce with China for another 90 days has averted a return to tit-for-tat tariffs, which previously saw US levies of up to 145% on Chinese goods. While the news caused global stock markets to rally last week, the extension leaves the vexed question of US-China trade relations unsettled.

Second, the pharmaceuticals industry faces significant uncertainty about US tariffs. Pharmaceuticals are currently exempt from US import tariffs pending an investigation into the sector, which Mr Trump has hinted could result in tariff rates on pharma products reaching as high as 250%. Higher rates on pharmaceuticals would increase the average US tariff for a number of European nations where pharmaceuticals make up a large share of exports to the US. For Ireland, Denmark and Switzerland, pharma accounts for 40%-50% of exports to the US. 

Third, as part of efforts to win over the US administration many countries and companies have pledged to step up purchases of US products or investment into the US. We’d be cautious in interpreting some of the numbers that have emerged. The newly signed US-EU trade agreement, for instance, projects €750 billion in EU purchases of US energy products and €600 billion in investment by 2028. Details of how the EU will triple energy purchases are unclear while the €600 billion investment is based on the private sector’s future investment intentions, as opposed to publicly funded, and therefore state-controlled, investment. 

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.5% at 9,139. Bitcoin reached a new record high of over $124,000 as US president Donald Trump signed an executive order allowing US retirement funds to invest in cryptocurrencies.

Economics

• The US administration extended its tariff truce with China for another 90 days to continue trade negotiations
• Mr Trump said that imported gold would not face US tariffs, following earlier reports by the FT that the US Customs and Border Protection agency had outlined levies on gold bullion
• US consumer price inflation remained steady at 2.7% in the year to July, increasing expectations that the Federal Reserve will cut interest rates in September. However, producer prices rose by 3.3% in the year to July, up from 2.4% in June, as the effects of import tariffs begin to feed through US supply chains
• Mr Trump chose EJ Antoni, head of the right-wing Heritage Foundation think tank, as the new head of the US Bureau of Labor Statistics following the sacking of former commissioner Erika McEntarfer
• US consumer sentiment unexpectedly fell in August, according to the University of Michigan, reversing some of the gains made in the previous two months
• UK GDP grew by 0.3% in the second quarter this year, down from 0.7% in the previous quarter but above market expectations of 0.1%
• UK payroll employment fell for the sixth consecutive month in July
• Scotland’s net fiscal deficit increased to 11.7% of GDP in 2024-25, according to estimates published by the Scottish government, nearly double that of the UK as a whole, driven by falling oil revenues and rising public expenditure
• UK chancellor Rachel Reeves is drawing up plans for a second planning and infrastructure bill that will further overhaul planning rules to allow for quicker delivery of national projects such as the third Heathrow Airport runway, the FT reports
• Indian prime minister Narendra Modi announced tax and regulatory reforms as part of plans to build a “self-reliant India” following the imposition of 50% US import tariffs against the country  
• Chinese industrial output growth slowed to 5.7% in July compared with the same month last year, the lowest rate since November 2020, amid trade tensions and concerns over the strength of China’s domestic economy

Business

• US car manufacturer Ford plans to invest $2bn in redeveloping a manufacturing site in Kentucky as part of efforts to produce more affordable electric vehicles
• Elon Musk said he will take “immediate legal action” against Apple for allegedly refusing to rank his social media site X or AI app Grok in the ‘must have’ section of the app store
• AI company Perplexity offered to buy Google Chrome for $34.5bn, ahead of Google’s upcoming federal court decision on remedies for its dominance of online search
• Technology companies Nvidia and AMD agreed to pay the US government 15% of their revenues from selling chips in China as part of a deal to secure export licenses. The US has previously banned the sale of some semiconductors to China over national security concerns
• Saudi Arabia’s PIF sovereign wealth fund wrote down $8bn of its investments in the country’s ‘gigaprojects’, such as Neom, amid budget overruns and low oil prices
• The EU approved a €4.1bn takeover of Just Eat Takeaway by Dutch investment company Prosus
• Defence manufacturer Rheinmetall said economies of scale and automation techniques will lower the cost of tanks and armoured vehicles in the coming years amid significantly increased European defence spending
• UK accessory retailer Claire’s appointed administrators last week after its parent business filed for bankruptcy protection in the US 

Global and political developments

• Russian president Vladimir Putin and Mr Trump failed to reach a ceasefire agreement during their meeting in Alaska. Mr Putin demanded Ukraine cede the regions of Donetsk and Luhansk in exchange for freezing the front line, the FT reports
• European leaders joined Ukrainian president Volodymyr Zelenskyy for a meeting in the White House following Mr Trump’s meeting with Mr Putin
• Mr Trump deployed the US National Guard in Washington after declaring a public safety emergency, saying the capital was “becoming a situation of complete and total lawlessness” as a result of crime
• Mexican president Claudia Sheinbaum said that Mexico’s independence was “not at risk” following reports that Mr Trump had ordered the US military to target Latin American drug cartels crossing the Mexico-US border
• The UK, France and Germany said they are prepared to reimpose sanctions on Iran if it fails to resume negotiations with the US on its nuclear programme
• UK defence secretary John Healey said the UK is ready to deploy troops to Ukraine to help secure peace if a ceasefire deal is reached 

And finally… pub goers in Watford are often left disappointed to discover that an office building named “Weatherspoon House” is the headquarters of the eponymous pub chain, not a Wetherspoon pub – wether-spoof