0:06 AM, 6th January 2025, About 2 days ago
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The recent rise in annual house price growth which saw prices reach their highest point since November 2022, stands in stark contrast with news of the fastest decline in manufacturing output in 11 months, Knight Frank says.
The firm’s head of UK residential research, Tom Bill, says the situation underscores the current economic complexity.
Manufacturing data, which coincided with the pound’s sharpest fall since May, represents the latest in a string of weak economic indicators since the government’s Budget announcement.
He says that businesses are increasingly concerned about the impact of rising costs, particularly the increase in employer National Insurance contributions.
Also, disappointing Christmas retail figures have further eroded consumer confidence.
Mr Bill said: “There are two reasons why house prices are currently out of sync. First, a number of buyers are sitting on sub-4% mortgage offers made before the Chancellor announced her economic plans on 30 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.”
He adds: “Bond yields have risen as financial markets price in the inflationary risks of a government planning to borrow and spend more.
“The five-year interest rate swap, used to price fixed-rate mortgages of the same length, was 4.3% last week compared to 3.8% in early October.”
Financial market expectations for Bank Rate cuts by the end of 2025 have been reduced and mortgage approvals in November plummeted to their lowest point since August.
That, Mr Bill says, suggests a tightening of demand as rising borrowing costs begin to impact homebuyers.
Another key factor supporting current house prices is the impending change to stamp duty rates.
The nil rate band for stamp duty is scheduled to revert from £250,000 to £125,000 in April, potentially increasing bills by up to £2,500 for some buyers.
First-time buyers face an even steeper potential increase of up to £6,250.
Mr Bill explains: “Even the prospect of a relatively small saving can temporarily boost trading volumes, as we saw during the stamp duty holiday of the pandemic.
“April might not be the cruellest month for the UK housing market in 2025, but a lull would be understandable.”
Knight Frank has now revised downwards its 2025 house price forecasts because of higher borrowing costs and the ongoing struggle to achieve robust economic growth.
Also, high wage inflation has fuelled speculation about the potential emergence of ‘stagflation’ which occurs when there is slow economic growth, rising prices and increasing unemployment.
Mr Bill said: “With the first major MRP poll since the election at the end of December predicting that Labour would lose its majority, what we do know is that scrutiny around the government’s next steps, including the possibility of further tax rises, will only intensify.”
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