Knight Frank leaves door open for post-Budget house price revisions

Knight Frank has left the door open to revise its house price forecasts after the chancellor’s first Budget in October.

Chancellor Rachel Reeves has warned of tax rises and spending cuts to fix what she describes as Labour’s economic inheritance from the previous Tory Government.
It comes after agency brand Knight Frank revised its house price forecasts upwards in May.

Rather than a decline, it predicted 3% growth for average UK prices, helped by falling inflation and an improving economic picture.
In the three months since, there has been a General Election and an interest rate cut.

Tom Bill, head of UK residential research at Knight Frank, said: “The Bank of England acted earlier than expected when it cut by 0.25% this month, but the outcome of the election was predictable.
“Our forecasts appear on track but the first Labour government in 14 years and the first rate cut since March 2020 have clearly changed the mood music.
“We have left our numbers unchanged for now but will reassess them after the Budget on 30 October.”

Knight Frank’s latest analysis suggests the mainstream sales market has been impacted by the rate cut more than the change of Government.

Following the drop to 5% from 5.25% and lower-than-expected inflation data, five-year swap rates fell towards 3.5% in August. Financial markets were pricing in a further cut in November.

It will lead to a “meaningful increase” in the number of lenders offering sub-4% mortgages this autumn said Simon Gammon, head of Knight Frank Finance. As a result, demand and sales volumes will be stronger in the final months of this year than in 2023, the agent is predicting.

The analysis suggests prime markets face more risk.

Bill said: “The prospect of the Budget means the outlook in prime markets is hazier.

“The decision to charge private schools VAT from January rather than September next year has created a mood of wariness ahead of 30 October.

“The measure by itself won’t have a dramatic impact in prime property markets, but together with other potential tax rises, it may keep demand in check.

“Given the Government’s pledge not to raise income tax, VAT or National Insurance, speculation has centred on capital gains tax, inheritance tax and pension tax relief among others.

“Changes will also be made to rules surrounding non doms, the 74,000 individuals living in the UK who do not pay tax on their non-UK income.

“How pre-existing overseas trusts are treated for inheritance tax purposes will be a particular focus for those wondering if large numbers of them will leave the UK.”

Knight Frank warned its prime central London (PCL) forecast is therefore subject to a bigger revision than other projections later this year. The annual decline was 2.4% for the third successive month in July, which it forecasts will narrow to a 1% fall by December.

Bill added: “Any impact would be less marked in prime outer London (POL), where we forecast an increase of 2% this year. Average prices in POL rose 0.6% in the six months to July, putting them on track for a low single-digit increase in 2024 as demand strengthens this autumn.”