Bank of England Housing Update (August 2024)

At its meeting on August 1th, 2024, the Monetary Policy Committee (MPC) voted by a majority of 5 to 4 to reduce the Bank Rate to 5.00%. However, four members preferred to maintain Bank Rate at 5.25%.

Mortgage rates have decreased in anticipation of this decision being made now (or in November). This 25 basis points Bank Base Rate cut is the first since 2020. This brings an end the joint-longest peak in rates since BoE was granted independence.

The rate cut came as a surprise to some, such as HSBC Economists who forecast the Bank Base Rate would not have been cut today but in November.

It does follow rate cuts by Canada, Denmark, Switzerland, and the EU.

This is good news for

• Remortgaging Homeowners who need to remortgage as their initial rate ends.
• First Time Buyers trying to meet higher affordability requirements.
• Landlords hoping not to increase rents due to increased mortgage costs.

Inflation

With inflation currently at 2% and the Bank of England is working to maintain its 2% inflation target. CPI Inflation decreased from 3.2% in March to the 2% target. It is expected to increase to around 2¾% in the second half of this year.

Bank of England on Housing

Indicators of housing market activity have been subdued, as past increases in interest rates have weighed on housing demand.

House prices – measured using the ONS house prices series– fell slightly in late 2022 and 2023 but have picked up more quickly than expected in recent months and rose by 0.8% in Q1.

Timelier house price indicators, including the Nationwide, Halifax and Rightmove measures, have also picked up from their troughs last year. Contacts of the Bank’s Agents expected some ongoing weakness, however, with house prices expected to be flat or to rise slightly .

Nominal house prices have been broadly flat since 2022 and have fallen in real terms and relative to nominal household incomes.

Bank staff estimate that increases in Bank Rate have reduced real house prices by around 8%, relative to a counterfactual of no rise in Bank Rate, since 2021.

Updated analysis by Bank staff suggests that much of the effect of tighter monetary policy on house prices may have already come through. Higher interest rates appear to have weighed on house prices by somewhat more than expected based on the historical relationship between the two.

Higher interest rates also reduce the transfer costs component of housing investment by reducing housing demand and hence the number of housing transactions.

Mortgage approvals for house purchases, a forward indicator of housing transactions, fell to a trough of around 40,000 per month at the start of 2023. Since then approvals have recovered, reaching around 60,000 per month so far in 2024, in line with the 2010–19 average.

Contacts reported that once the general election had happened, and given the potential prospect of lower Bank Rate, demand for houses could pick back up.

Affordability constraints have slowed momentum in the new build markets. Demand for mid-market properties is impacted more than demand for higher-end properties, which remains strong. Expectations are for static house prices, or minimal increases.

Renting

Demand for rental properties continues to cool, although supply remains constrained. Rental price inflation has slowed, and some estate agents are reporting a rise in rental arrears.

Housing Investment

Following a period of pronounced weakness in 2023, housing investment is expected to grow moderately over the forecast period, stronger than expected in the May Report

Housing investment rose by 3% in 2024 Q1, higher than the almost 1% fall expected at the time of the May Report, although past weakness means that it remains around its level in 2021. The unexpected strength in Q1 was concentrated in dwellings investment, reflecting strong growth in repair and maintenance of existing dwellings, as well as a flattening off in the weakness of new builds.

Housing investment is expected to be flat in Q2 and to rise by 1.2% in Q3, higher than expected in the May Report, reflecting the recent pickup in housing activity and house prices.