(Bloomberg) -- UK house prices rose less then expected in October, according to one of the country’s biggest mortgage lenders, suggesting the property market was already losing momentum before Wednesday’s shock budget.
Nationwide Building Society said that the average price of a home climbed just 0.1% to £265,738 ($342,710), down from a 0.6% increase in September. Economists had forecast a 0.3% gain. It left prices 2.4% higher than a year earlier but below the all-time high seen in the summer of 2022.
The survey suggests that buyers turned cautious ahead of the budget as concerns over hefty tax rises mounted in the run-up. Those fears were more than confirmed on Wednesday by the fiscal plans outlined by Chancellor Rachel Reeves, which have roiled financial markets.
Traders have scaled back bets on how much more the BOE will cut interest rates in the wake of a huge increase in government spending and borrowing that risks fanning inflation. Expectations of a slower pace of rate cuts will likely feed into mortgage costs, threatening to further weigh on a patchy recovery in the housing market in 2024.
While the BOE is expected to deliver a second reduction in borrowing costs at its meeting on Nov. 7, hopes of a follow-up move in December have all-but evaporated. On Thursday, the pound and government bonds tumbled, while homebuilders led a selloff in UK shares as swaps rates that are used to price mortgages spiked.
“The clear risk is that the recent rises in swap rates are sustained, mortgage rates don’t fall as fast and house prices will rise by less as a result,” said Alex Kerr, UK economist at Capital Economics.
The budget also raises questions about how well consumer sentiment will hold up after Reeves announced the biggest tax hike in 31 years to help repair public services and plow money into investment. While businesses will bear the brunt, there are fears that workers will also pay a cost as firms withhold pay rises and increase prices to protect their profit margins.
The developments are a setback for the housing market, which had been gaining momentum in recent months on the back of cooling mortgage costs. Earlier this week BOE data showed that mortgage approvals climbed to their highest in over two years in September.
“We expect this year’s house price recovery to come under pressure following the increase in borrowing costs triggered by the Budget,” said Tom Bill, head of UK residential research at Knight Frank. “How much depends on the reaction of bond markets in coming days and the Bank of England’s rate decision.”
Bloomberg Economics said the “bigger picture” is one of affordability gradually improving as wage growth outstrips inflation and the BOE continues to cut interest rates through 2025. There is also likely to be a rush of buyers seeking to complete deals before stamp duty, a property tax, goes up in April.
What Bloomberg Economics Says...
“UK house prices grew at a softer pace as uncertainty around by the Autumn Budget on Oct. 30 likely kept potential buyers on the sidelines. With greater clarity, we expect the recovery to firm up from here as the Bank of England cuts interest rates at a gradual pace and real incomes continue to grow.”
—Niraj Shah, economist. Click to read the REACT on the Terminal
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