Analysts assess how far back Sunak can help push mortgage rates

Mortgage rates look likely to fall after Rishi Sunak’s appointment as Prime Minister but analysts are still unsure how far the clock can be pushed back.

Financial markets reacted badly to the short-lived premiership of Liz Truss, with swap rates surging off the back of an uncosted mini-Budget.

This pushed average mortgage rates to 6% but average pricing has dropped since Truss resigned and was replaced by Sunak last week.

So where does this leave mortgage borrowers and the housing market?

Tom Bill, head of UK residential research at Knight Frank, said: “Given the central role that spiralling mortgage rates played in the downfall of Truss, what happens next in the UK housing market will resonate strongly with the electorate.”

He said the public will want to see confidence restored in the debt markets and more certainty returns to the property sector.

Bill said: “After three days in office, there was evidence that the impact of the mini-Budget was close to being reversed.
 
“By Wednesday, UK gilt yields had either fallen below their pre-mini-Budget level or were heading in that direction, depending on their maturity.

“The five-year swap rate, which is used to price most UK mortgages, was hovering around 4.5%, a shade higher than it was before former Chancellor Kwasi Kwarteng got to his feet to outline the government’s economic plan on 23 September.

“The rate may decline further, depending on the content of the Budget and accompanying report from the Office for Budget Responsibility on 17 November.”

He cautioned that in the short-term Sunak won’t be able to travel much further back in time than late August.

Bill added: “Interest rate expectations had been rising over the summer as energy costs pushed up inflation and the bank rate will inevitably rise from its current level of 2.25% on 3 November.

“However, once there is relative stability, the UK housing market can enter a second and more predictable phase.

“More certainty will underpin transaction volumes but not necessarily prices. In fact, higher trading volumes would only hasten the price correction we expect will take place.”

As mortgage rates normalise and more people roll off five-year fixed-rate deals, this will continue to put downwards pressure on prices, Bill said.

He added: “We expect UK prices to revert to where they were in the summer of 2021, however low levels of unemployment and well-capitalised banks mean we do not expect the sort of double-digit price declines seen during the global financial crisis.

“The Stamp Duty cut announced in the mini-Budget may even help liquidity to some degree. 

“Any benefit was quickly eclipsed by the prospect of higher mortgage costs.”

Richard Donnell, head of research for Zoopla, said the days of “ultra-cheap mortgages” are behind us.

Donnell said: “Comments on house building from the new prime minister in the summer leadership election suggest he sees the importance of making sure we build homes and the infrastructure to support them.

“This would help to ease any extra pressure on local services. 

Sunak said he favours reforms to increase density in our inner-cities, investing in regenerating brownfield land across the country, and pursuing developments that have community support.” 

He suggested the government needs to think more long-term when it comes to housing by keeping the economy growing and borrowing costs affordable, while creating an attractive environment to grow and improving our ageing housing stock across all areas and housing tenures.