The UK housing market is showing signs of cooling as higher borrowing costs and economic uncertainty following the Labour government’s first budget in over a decade take their toll. According to data from Nationwide Building Society, house price growth slowed unexpectedly to just 0.1% in October, defying economists’ predictions of a 0.3% rise. On an annual basis, price appreciation decelerated from 3.2% in September to 2.4% last month.
Robert Gardner, Nationwide’s chief economist, noted that while housing activity has remained relatively resilient in recent months, with mortgage approvals nearing pre-pandemic levels, the significantly higher interest rate environment is starting to weigh on demand. The slowdown comes as investors continue to digest the implications of Chancellor Rachel Reeves’s budget, which outlined substantial government borrowing alongside major tax hikes.
Borrowing Costs Revisit Annual Highs
In the aftermath of the budget, UK government bond yields, which serve as a benchmark for borrowing costs, once again touched their highest levels this year. The yield on the 10-year gilt reached 4.526% in global trading on Friday, matching the peak hit on Thursday as investors predicted a slower pace of interest rate cuts from the Bank of England. While yields have since edged back slightly, they remain elevated compared to recent months.
The scrutiny of bond market movements has been particularly intense following the budget due to the substantial borrowing outlined by Reeves, coupled with significant tax increases. However, the reaction in the gilt market, while noticeable, has not been as dramatic as the turmoil that followed the infamous “mini-budget” of former Prime Minister Liz Truss and her Chancellor Kwasi Kwarteng in 2022.
A Tale of Two Budgets
Darren Jones, the Chief Secretary to the Treasury, sought to differentiate the market response to the current budget from the chaos that ensued after Truss’s fiscal plans. In an interview with Sky News, Jones emphasized that the current market movements are a normal reaction to the wealth of new information about the economy and the nation’s finances presented in the budget.
There’s a lot of new information about the economy and the nation’s finances presented to Parliament, and it’s normal for markets to respond.
I think we’ve all got PTSD from Liz Truss and just let’s compare the two different scenarios, because they’re very, very different.
– Darren Jones, Chief Secretary to the Treasury
Jones highlighted the stark contrast between the current government’s approach and that of the Truss administration, which sacked the permanent secretary, ignored the independent Office for Budget Responsibility, and announced £45 billion in unfunded tax cuts. The ensuing market chaos ultimately led to Truss’s downfall after just 44 days in office.
Economic Uncertainty Persists
Despite the government’s efforts to reassure markets, the UK economy continues to face significant challenges. Inflation remains stubbornly high, eroding household purchasing power and weighing on consumer confidence. The Bank of England has raised interest rates repeatedly in an effort to tame price growth, but this has also increased borrowing costs for businesses and homebuyers.
The housing market slowdown is just one symptom of the broader economic uncertainty gripping the nation. As the UK navigates the post-pandemic recovery, grapples with the ongoing fallout from Brexit, and adjusts to a new political landscape, many analysts predict that the road ahead will remain bumpy.
Looking Ahead
As investors continue to digest the implications of the Labour government’s budget, all eyes will be on upcoming economic data releases and policy decisions from the Bank of England. The central bank’s next interest rate decision, scheduled for later this month, will provide further insight into the delicate balancing act policymakers face as they seek to curb inflation without stifling economic growth.
For the housing market, the key question is whether the recent slowdown in price growth marks the beginning of a more prolonged downturn or merely a temporary blip in an otherwise resilient sector. Much will depend on the trajectory of the broader economy, the availability of affordable mortgages, and the confidence of buyers and sellers in the face of persistently high borrowing costs.
As the UK navigates this period of economic uncertainty, one thing is clear: the road to recovery will be neither smooth nor swift. The challenges posed by high inflation, rising interest rates, and political instability are likely to persist for some time, testing the resilience of businesses, households, and policymakers alike. Only time will tell whether the UK economy – and its housing market – can weather the storm and emerge stronger on the other side.
