Home Property Finance & InvestmentMortgages A decline in transactions in November indicates that ‘the BoE may have overcompensated at the expense of the property market’

A decline in transactions in November indicates that ‘the BoE may have overcompensated at the expense of the property market’

by LLP Finance Reporter
11th Dec 23 3:55 pm

Thursday will see the Bank of England’s Monetary Policy Committee (MPC) sit for their monthly meeting to discuss the trajectory of the UK’s macroeconomic landscape going forward into the next year.

The previous two meetings resulted in the nine members deciding to hold the base rate of interest at 5.25% following fourteen consecutive hikes beginning in December 2021.

This week, rate-setters are tipped to follow the current trend, with the Fed and ECB poised to do the same in their own respective meetings. This comes despite a reported drop in the inflation rate last month, with the Office for National Statistics (ONS) announcing a figure of 4.7% YOY – a fall of 1.6% from the previous month.

David Hannah, Group Chairman of Cornerstone Tax, the UK’s leading property tax advisory, argues that the BoE ought to seriously consider cutting the base rate in the new year, providing the property market with the stimulus it requires.

These predictions surrounding the MPC have emerged beneath the backdrop of a surprising trend within the mortgage sector. In recent weeks, the nation’s top lenders, including Natwest, Nationwide and Barclays, have pursued a string of cuts to their fixed-rate products, with the average cost of a two-year mortgage falling below 6% in the previous week.

Whilst this may read like welcome news to prospective first-time buyers, the current price is a far-cry from the average rate in December 2021, which stood at 2.34%.

It therefore remains unclear whether a continued interest rate pause will sufficiently boost demand within the UK’s housing market, with data from Rightmove revealing a 1.9% fall in average asking prices for newly listed houses in December, more than the historic average decline for the final month of the year, indicating further reduced competition amongst prospective buyers.

According to David Hannah, the BoE ought to look towards decreasing the base rate of interest in the new year, provided inflation continues its current downward trend.

A target base rate of 3-3.5% would prove the most pragmatic, combatting stubbornly high inflation rates whilst also encouraging mortgage lenders to pursue further cuts to interest rates.

Fiscal and regulatory intervention are also necessary to get the property market back up and running, with the removal of impediments to private rental sector investments providing a necessary step to resolving supply and demand imbalances that are currently plaguing landlords and tenants alike.

David Hannah, Group Chairman of Cornerstone Tax, discusses what lies in store for the UK property market next year.

Hannah said, “2023 has been a turbulent year in the UK property market, with successive interest rate increases and a generally hawkish approach to the control of inflation by the Bank of England. Emerging trends, such as a 17% decline in transactions in November indicates that the BoE may have overcompensated at the expense of the property market.

“That being said, there has been no crash as some have predicted, but rather, a softening in asking prices and a demonstrable development of a buyer’s market. This can however, be contrasted by some parts of the UK being property hotspots where prices have actually increased.

“November inflation figures and mortgage approvals should indicate an overall cooling off of the UK economy which, if we are to avoid a recession next year, must be acknowledged by the BoE and, in an effort to avoid a sudden crash of inflation, will increase pressure on the MPC to start reducing interest rates sooner rather than later.

“It is hard to see what the government can do in 2024 that will affect the structural and affordability issues currently affecting the UK property market. We have a chronic undersupply of new build homes at a time when we have a net population increase, thereby increasing demand and supporting prices in a weak market. In order to combat the shortfall of housing, the government should remove the impediments that currently exist within the private rental sector – thereby, making homes available for those who wish to rent, have to rent, or simply cannot afford to buy.”

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