Sub-4% rates may be needed for a market pick-up

Like the rest of the market I expect, January and February saw some of our busiest months on record.

However, almost like clockwork, once we saw five-year fixed rates edge back up over 4%, activity began to slow.

While, of course, other factors are at play, such as house prices and overall market confidence, we continue to see mortgage rates as the biggest factor influencing purchase activity.

Whether it’s first-time buyers or home movers, there seems to be something about a sub-4% rate that boosts buyer confidence.

Naturally, everyone likes to think they are getting a good deal, and for some not in a hurry to move, that slight uptick in mortgage rates seems to halt them in their tracks.

Given the recent fall in inflation to 3.4% – the lowest level in almost two and a half years – we could see the return of 4%-ish mortgage rates during 2024, although much will depend on when the Bank of England decides to lower its interest rate.

The Office for Budget Responsibility’s (OBR) latest prediction is that interest rates will fall more sharply than its previous forecast in the autumn.

It predicts we will see interest rates fall from their current 5.25% to 4.2% in the final quarter of 2024 and 3.3% in the medium term. While it says the situation remains volatile, it believes interest rates could reach 2.7% by 2028.

A lot of course will be dependent on inflation. While inflation may have dropped significantly from its 41-year high of 11.1% in October 2022, the current 3.4% rate is still above the 2% target.

While the Bank will want to avoid risking inflation edging upwards again by cutting interest rates too soon, it also needs to balance this against the potential risk to the economy of keeping interest rates unnecessarily higher for longer.

The OBR is predicting inflation to come down to 2% in Q2 of this year, falling further to 1.5% during 2025, before rising again to 2% in 2028, with energy prices underpinning its forecasts.

These estimates differ slightly from the Bank of England’s – the most notable contrast being that the Bank predicts inflation to still be 2.7% in 2025.

I recently attended a Royal Institution of Chartered Surveyors valuation conference, where a speaker from the Bank of England highlighted that many of the economic factors which led to Base Rate rising are still prevalent in the economy today, so it cannot fall that quickly.

However, somewhat conversely, many of the factors that kept it incredibly low for a decade are also still present.

Like many, I belong to a generation where a 4-4.5% mortgage rate is the norm, but I suspect there are some potential buyers—especially first-timers – who may not have reached that realisation just yet.

While it is highly unlikely we will ever see a return to the record low rates of previous years, I suspect some potential younger buyers may still be under the false apprehension that we will.

Any cut to interest rates does have the potential to give buyers confidence that mortgage rates are going to come down again and help reignite interest though.

In terms of property transactions, the OBR forecasts residential property transactions will be broadly flat in 2024 but will reach pre-pandemic levels in early 2025.

This will be matched with a fall in house prices of around 2% in 2024, it predicts. Supported by falling mortgage rates, it then expects house prices to grow around 2% in 2026.

While the stop-start nature of housing transactions we have seen over the past couple of years isn’t helpful in some respects, I think we will have more of them over the coming year. While the market might have quietened at the moment, I could set my watch by it that once we see rates fall below 4%, we will see demand come back.

Simon Jackson is managing director at SDL Surveying

First published with The Intermediary