Inflation came down unexpectedly in the year to December from 2.6% to 2.5%. Is it enough to have a positive effect on the UK housing market?
The latest Office for National Statistics (ONS) figures on inflation were more positive many had predicted, which will be welcome news to Chancellor Rachel Reeves after facing criticism in recent days due to the falling value of the pound while government borrowing costs spiked.
It means inflation continues to hover just above the government’s target of 2%, but remains significantly lower than it was in October 2022, when consumer prices sky-rocketed and CPI inflation hit a high of 11.1%.
When it comes to the UK property market, inflation can have some impact on how buyers and sellers behave. It can affect confidence and affordability, while also having some impact on mortgage rates; linked to when the Bank of England’s monetary policy committee (MPC) will next decide where to set interest rates, which currently sit at 4.75%.
Last month, interest rates were held at this level, despite hopes of a fall, and the next MPC meeting will take place in February. Michael Saunders, a former member of the MPC, said the latest inflation figure would be “some help” in trying to ease some of the worries over UK interest rates.
Latest property market figures
The UK housing market has proven its resilience over the course of 2024 and into the new year, with house prices back on an upwards trajectory and transaction numbers also up from where they were in 2023. With inflation now at a much lower level, despite being slightly above target, this resilience is expected to continue with appetite for property being consistently high.
The latest ONS house price index, also released today, revealed that property prices had increased by 3.3% in the year to October 2024. The ONS uses Land Registry sold price figures to compile its index, meaning it lags slightly behind other indices that use asking price figures or mortgage data.
The biggest annual price hikes were seen in the North East, the North West, and Yorkshire and the Humber, which recorded house price gains of 5.9%, 5.7% and 5.7% respectively. At the bottom end of the scale, London experienced a -0.1% decline, while the South East recorded a 1.4% price gain.
Commenting on the latest figures, Darrell Walker, director of sales and distribution at ModaMortgages, pointed out that the 3.3% house price rise is “a clear sign of the housing market’s resilience in the face of the economic and political challenges that homebuyers and investors had to navigate for much of 2024.”
He added: “Investors and landlords have demonstrated remarkable adaptability over the last few years, with many still actively pursuing the new opportunities that continued to emerge in the property investment landscape. We are expecting this trend to continue through 2025, particularly as the Bank of England is predicted to be cutting the base rate over the coming 12 months.
“Indeed, should borrowing costs ease and once the full impact of the Autumn Budget has been digested, the market is anticipating an uptick in activity, which will likely drive further growth in ONS data over the next few weeks and months.
“Financing will become more accessible, but it’s crucial that landlords focus on simplicity and speed to take full advantage of the expected house price growth – potentially as much as 4% – that many economists and leading agents are forecasting for 2025.”
Inflation and mortgages
With inflation proving more sticky than many had hoped and continuing to hover above the government’s 2% sweet spot, the upcoming decision on interest rates by the Bank of England is uncertain. Analysts are likely to predict either a small fall, or for the rate to be kept at its current level once more, but the Bank will be under pressure from the market to bring rates down.
However, this “wait and see” approach isn’t always helpful, notes Paresh Raja, CEO of Market Financial Solutions, who also urges lenders to ensure their offerings match their clients’ requirements in order to continue the current trend of optimism in the property market.
He said: “The key focus now shouldn’t be on whether the BoE cuts the base rate at its next meeting or even the one after that. This attitude actually creates hesitancy, encouraging a ‘wait and see’ approach.
“Instead, as an industry, we need to continue adapting to the current lending landscape and ensure that brokers and borrowers have the support they need to execute their plans effectively. While we may not see a return to lower rates as quickly as some might have hoped should inflation remain above 2%, the market has demonstrated resilience through far tougher conditions in recent years, which is important to keep in mind.
“We’ve already observed positive signs of growth in the early months of this year, particularly when it comes to house prices and buyer demand. So, if lenders can tailor their offerings to meet their clients’ needs, there’s every reason to remain optimistic about the outlook for the months ahead.”
