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Market Insight

New year, new cheer
Winter 2024

The cost of living squeeze and the state of the economy put the brakes on the housing market in 2023. But despite this background, it was still a year of two halves, with a steady shift towards a more upbeat mood in the second half.

In the first half of the year, the fallout from the mini-Budget in autumn 2022 continued. The Bank of England ordered successive base rate rises, as it battled to get inflation under control.

The cost of mortgages also surged, peaking in July when the rate on the average two-year fixed deal hit 6.25% (for a borrower seeking a loan for 75% of a home’s value).

In the second half of the year, the outlook brightened a little. The Bank paused rate rises as inflation began to ease. Mortgage rates also started to fall, as markets anticipated rate cuts happening sooner than previously thought, bringing relief to households who needed to remortgage, or were planning to move home. But, as the affordability pressures on buyers lessened, rents continued to spiral - to the dismay of tenants.

The aim (albeit unacknowledged) of the base rate rises was to produce a recession. This is yet to materialise. However, it is estimated that so far we have felt only half of the impact of the rate increases. The Bank of England and Office for Budget Responsibility (OBR) have both downgraded their growth expectations for 2024, although the economy should still show some limited growth.

As a result, the focus is now shifting towards the moment when rates can be cut to kickstart that growth. Falling inflation means that financial markets now sense that rates will be reduced faster than was previously forecast. In December the markets were pricing in the possibility of four base rate cuts totalling 100 basis points in 2024.

"Mortgage rates will move downward, albeit slowly. Deals of below 4% should become more widely available for borrowers with large deposits"

In light of this, mortgage rates continued their downward path throughout the tail end of 2023, with the return of deals priced well below 5%. We contend that rates of this level will have started to put a floor under house prices.

But this scenario presents a new challenge for the Bank of England’s rate-setting Monetary Policy Committee (MPC). The pricing of most mortgage deals depends more on the financial markets’ view of the future level of rates rather than the current base rate. But the MPC wants borrowing costs to remain high to ensure that inflation does not reignite.

For this reason, MPC members are trying to temper market expectations by warning that inflation is proving sticky, and that talk of rate cuts is premature.

The MPC’s insistence that inflation has yet to be tamed has some validity, particularly as the energy cap went up again this month. However, we still think base rate cuts are likely this year, and that they will probably begin in summer. This means that mortgage rates will move downward, albeit slowly. Deals of below 4% should become more widely available for borrowers with large deposits.

At the same time, people’s incomes are likely to increase at a faster pace than the cost of goods and services, meaning that affordability will improve.

This means we think that 2024 is likely to be a better year for the housing market than 2023, with 10% more homes changing hands.

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