Knight Frank: Lending outlook improves but risks remain

The lending outlook is improving for the housing market but psychological milestones remain, Knight Frank warns.

The latest UK market commentary from the agency and property brand said the usual seasonal autumn bounce for property was non-existent this year due to high mortgage rates and speculation over where the bank rate will peak.

More positive signs have begun to emerge over the past seven days with the rate of inflation falling, according to Tom Bill, head of UK residential research at Knight Frank.

He said: “That is undiluted good news for anyone buying or re-mortgaging as the BoE’s task of taming inflation by raising rates feels closer to completion.

“The BoE could even start cutting rates as soon as next February, said influential Wall Street bank Goldman Sachs last week. Admittedly this would be in response to a weaker-than-expected economy, but the second quarter next year was the most likely time for a cut, the bank said.”

Inflation dropping under 5% underlined the “importance of psychological milestones” in financial markets, Bill added, “something that has become increasingly apparent for anyone buying or re-mortgaging.”

Simon Gammon, head of Knight Frank Finance, said the cheapest five-year fixed-rate mortgages have fallen from just over 5% to almost 4.5% in two months.

He said: “With the five-year swap rate not much lower than that, margins are getting thin for lenders keen to do business in a low-volume housing market.

“The recent rate drops show lenders are feeling more positive about the outlook and there is an impact beyond the cut. Lower rates mean lenders have more opportunities to help borrowers which itself will lead to a more liquid and competitive lending market.”

Bill suggested there are glimmers of hope ahead of this week’s Autumn Statement, which may contain measures to support the housing market including Stamp Duty reforms.

He concluded: “The fact the five-year swap rate is currently lower than the bank rate demonstrates that financial markets believe the direction of travel for borrowing costs is down.

“As mortgage costs fall, a seasonal bounce next spring gets more likely.”

Risks do remain though, with Bill warning: “A General Election campaign tends to create a national mood of uncertainty while any escalation of the conflict in the Middle East could prove inflationary if energy markets are rattled, which would put upwards pressure on rates again.

“The outlook for the UK housing market is certainly improving but next year won’t be hurdle-free.”