Residential Real Estate
Real Estate

August 2024

The Bank of England (the ‘BoE’) Monetary Policy Committee’s recent decision to cut interest rates to 5% and the anticipated government taxation regime announcement in October 2024 are likely to affect both the wider UK housing and Prime Central London (‘PCL’) markets. In this market update our Residential Real Estate team take a look at the possible effects.

Impact on Swap Rates and the UK housing market

Let’s dive in. The UK housing market continues to show robust price growth. Earlier analysts’ predictions of an expected 1.8% rise in housing prices in July 2024, prices have been surpassed by actual increases of 2.1%. This unexpected growth reflects strong pent-up demand as borrowing conditions improve. In anticipation of the BoE’s interest rate cuts, several mortgage lenders, such as HSBC, NatWest and Nationwide, have recently reduced their mortgage rates boosting approvals to around 60,000 per month.

Following the BoE’s decision, five-year swap rates fell to 3.6%, the lowest since February 2024. This is under the crucial 4% threshold and experts are predicting rates will stabilise around 3.25% above pre-pandemic levels.

Why does this matter? The current trends suggest that lenders expect long-term interest rate reductions, making 5 to 10 year fixed mortgages the most cost-effective options. This indicates that lenders are keen to secure borrowers at these lower rates, which are predicted to drop over the next few years – a positive signal for the housing market.

Overall, there is cautious optimism. While house prices are rising steadily, borrowing conditions are improving and no dramatic drops in rates are expected.

The contrasting trends in PCL: signs of recovery?

In the wake of 20+ months of economic fluctuations and high interest rates, the UK property market has shown a mix of different trends. In the broader market Q2 of 2024 saw a 22% increase over the previous quarter for properties valued between £3-15 million. However, during the same time period, PCL prices were falling, with valuations dipping slightly. The trend of increasing average discounts has continued for the seventh consecutive month after three years of declines. This suggests that PCL may be influenced by other factors and the recent interest rate reductions may have a limited effect.

Despite the ratio of available stock to monthly sales at 25:3 in Q1,2024 to 22:6 in Q2, 2024, supply remains high, with an above long-term average of 20. Consequently, sellers must maintain realistic expectations regarding property prices, especially as the market broadens and buyers are presented with more options.

Key takeaway:

  • Demand is rising, but price drops in PCL are likely to continue as supply remains high.

The Government’s taxation updates and potential impacts

Lastly, we address the central government’s upcoming taxation regime, due to be announced in October, and its potential impact on the housing market. The Labour Government’s mandate is pro-growth, with an expectation of coming into effect by 6 April 2025. However, the practical implementation remains uncertain.

They aim to boost public service investment and stimulate the economy without raising income tax, national insurance, or corporation tax, which constitute about 80% of tax revenue. Proposed changes include:

  • Taxation of non-UK domiciled individuals – individuals with 10 consecutive years of non-residence will be exempt on their foreign income and gains received in the first 4 years of residence in the UK. It is irrelevant whether the income and gains are remitted to the UK;
  • Introduction of VAT on private school fees;
  • Abolition of furnished holiday lets (FHL) regime;
  • Adjustments to taxation on carried interest; and
  • Changes to transfer of assets abroad.

It is unclear if the government can achieve growth with these mechanisms or if they will backtrack on promises. As such, borrowers, lenders, and property owners should stay vigilant in the coming months.

At Lawrence Stephens we are dedicated to helping our clients navigate these changes. If you have any questions or need assistance, please do not hesitate to contact our specialised Residential Real Estate team.