Thought of the Week

Understanding the potential impact of base rate cuts on UK house prices

March 14, 2024 3 Minute Read

By Jen Siebrits Michael McGill

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We expect the Bank of England to start cutting the base rate in Q3 2024. Typically, this will translate into lower mortgage rates, which subsequently stimulates activity in the housing market. This, in turn, generally leads to house price growth.

Looking back at past base rate cut cycles, house prices increased by 8% on average in the year following the first rate cut (of the cycle). Most cycles follow a very similar pattern, but the period over the Global Financial Crisis (GFC), is somewhat of an outlier. Unlike the other three cycles, it was accompanied by a spike in unemployment and the housing market was particularly weak. As a result, house prices grew by just 2% in the year following the rate cut. Excluding this anomalous period would lead to a higher average increase in house price growth of 11%.

Still, regardless of whether the historical benchmark is 8% or 11%, we do not expect to see a similar level of rebound in prices given the current environment. This partly reflects affordability pressures, which are significantly higher now than at the time of the previous cycles. For example, the house price to earnings ratio is currently 6.1, which, while similar to levels over the GFC period, is around double that of the other three cycle periods. In addition, first time buyers currently need to pass a mortgage stress test to prove they can afford repayments at interest rates of around 8%. This will hold back demand and constrain the buying power of home buyers. All things considered, while the upcoming period of falling interest rates will boost house prices, it will be by a lesser extent than the historical average. Our current forecast is for house prices to increase by 4.0% in 2025.

Figure 1: The relationship between base rates and house price growth

Source: Bank of England, Nationwide

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