This week’s inflation data holds clues for UK housing

By Tom Bill, head of UK residential research at Knight Frank

Rarely has one month’s inflation figure been so widely anticipated by such a large group of homeowners. Whether you are buying, selling, or re-mortgaging, this week’s number should provide a useful steer on the direction of travel for interest rates. If there are no nasty surprises or it is lower than expected, it will bolster the arguments of those who believe the bank rate is near its peak. This is particularly true in relation to the core inflation reading, as we have previously explored . If it is higher than expected, it raises the prospect that rates may stay higher for longer and could, for example, make a fixed-rate mortgage more appealing than a tracker.

Mortgage lenders have been cutting rates in recent weeks on the back of better-than-expected inflation data in July. The five-year swap rate, which lenders use to price fixed-rate deals of the same length, has fallen back (marginally) from its post-mini-Budget highs and was hovering just above 5% last week. Although this compares to a figure of less than 1% two years ago, the UK property market has so far defied the negative hyperbole in 2023. It’s neither ‘on its knees’ or ‘heading over a cliff’. In fact, for such a politically-divisive and emotionally-charged topic, the reality is fairly pedestrian.

The latest Halifax and Nationwide numbers suggest the market is getting weaker, but the annual declines being recorded are still less than 5%. A double-digit price decline feels like a stretch this year, particularly if the bank rate peak is close. Not that national indices will necessarily tell you what is happening on your street, as we have argued before.

Demand continues to benefit from the shock-absorber effect of strong wage growth (which may start outpacing inflation this week), lockdown savings, the availability of longer mortgage terms, lender flexibility and the popularity of fixed-rate deals in recent years. Furthermore, last week’s GDP numbers beat expectations, meaning the prospect of a sentiment-sapping recession has become more remote. Housebuilder Persimmon also guided the market towards the top-end of its range for the number of houses it will build this year.

Despite this steadily-improving picture, buyers are understandably price sensitive in the current economic environment. The London market outperformed the wider UK in July largely because of the fact prices in the capital had risen so little during the pandemic, as we explore here. Buyers want what they believe to be tomorrow’s (lower) prices and sellers tend to want the (higher) prices seen during the pandemic. This expectation gap (together with higher mortgage costs) has cut sales volumes notably. Mortgage approvals in June were a fifth down on the five-year average excluding 2020.

Lower trading volumes means lenders are particularly keen to lend, which should keep downwards pressure on mortgage rates if there are no nasty surprises in the inflation data this week.

One final thought ahead of Wednesday’s data release. Is the monthly unveiling of a percentage the most useful approach for the economy, wonders Savvas Savouri, the chief economist at hedge fund Toscafund. “The technology exists to far sooner reliably enlighten us on how prices are moving,” he says. “Higher frequency releases would (…) reduce the likelihood of abrupt data-shifts surprising naturally risk-averse debt, currency and capital markets.”

They would no doubt also be welcome by anyone trying to arrange a mortgage at the moment.