UK house prices strengthen but Budget cracks show – Knight Frank
Buyer demand is being underpinned by imminent Stamp Duty rise and mortgage offers that pre-date the Autumn Budget.
The mixed signals coming from the UK economy and housing market have become yet more confused in the opening weeks of this year as the fallout from the Budget continues to be felt says Tom Bill (pictured), Head of UK Residential Research at Knight Frank.
At the same time as manufacturing fell at its fastest pace in 11 months, annual house price growth rose to its highest rate since November 2022.
The manufacturing data is the latest in a series of weak readings since the Budget and, says Bill, businesses are concerned about the impact of higher costs, including a rise in employer national insurance. Shaky Christmas retail figures underlined the impact on consumer confidence.
Out of sync
Bill believes there are two main reasons why house prices are so out of sync:
A number of buyers are sitting on sub-4% mortgage offers made before the Chancellor announced her economic plans on 30th October. Agreements are valid for up to six months, which means some will be insulated from the increase in borrowing costs triggered by the Budget.
Financial markets are currently expecting between two and three quarter-point cuts to the bank rate by the end of 2025, which is about three fewer than they anticipated in September.
Lowest level since August
And, in a warning sign of what is to come, mortgage approvals in November fell to their lowest level since August and the squeeze on demand is likely to tighten as rising borrowing costs start to bite.
The second factor behind the current buoyant house prices is the imminent change to the rate of Stamp Duty.
The nil-rate band for stamp duty reverts to £125,000 from £250,000 in April, which means bills will rise by up to £2,500. A similar reversion means up to £6,250 in additional stamp duty for first-time buyers.
Looking ahead, however, Knight Frank has revised down its expectations as it believes borrowing costs will stay higher for longer and economic growth will struggle to gain momentum.
With wage inflation still stubbornly high, it has sparked speculation about the possibility of ‘stagflation’, a situation where economic growth is slow while prices and unemployment rise.
If that happens, Bill warns, the Bank of England will have to decide between boosting growth or keeping rates high to tame inflation.
