Borrowing costs spike: should we be worried?
Making sense of the latest trends in property and economics from around the globe
3 minutes to read
UK government borrowing costs spiked yesterday as investors digested the scale of borrowing in Wednesday's budget. Swap rates surged, housebuilder shares tumbled, and any further falls in mortgage rates are probably on ice for now, to say the least.
How worried should we be? Well, for starters, this isn't a Truss-like threat to the UK's economic stability. Gilt yields rose roughly 100 basis-points in the three days following the mini-budget, compared to a roughly 25-basis-point increase since Reeves’ speech. That said, investors can see that these proposals stretch credibility and will require either more tax rises or borrowing further down the line.
This "looks horribly like a repeat of the silly games played by the last government," says Paul Johnson of the IFS. "Make it look like the fiscal numbers add up by being generous this year and pencilling in implausibly tight spending plans later on."
Mortgage rates
What does all this mean for mortgage rates? Well, lenders have already cut margins to the bone, making them unusually vulnerable to volatility in the swaps market. However, it remains the case that mortgages are priced based on the medium-term path of UK interest rates. On that front, not much has changed.
For starters, the Bank of England, which will announce the results of its November meeting next week, knew this was coming - see this piece from the FT's Chris Giles: "If the BoE says next week that their November meeting was the first time they have considered the effects of Labour’s fiscal plans and these are more inflationary, it would reflect very poorly on its ability to respond to events," he says. "For that reason, I think it highly unlikely."
Indeed, Goldman Sachs reckons the Bank will now opt for a pause in December, rather than a cut, before executing sequential cuts from February, taking the base rate to 3% in November 2025, rather than its previous forecast of 2.75%.
This will be disappointing for homebuyers, as will the ill-advised tinkering with stamp duty, but it's hardly a game-changer. Mortgage rates starting with a three will be the best it will get for the foreseeable, which will be enough to sustain a moderate recovery in property sales volumes and values. We'll revisit our forecasts in the coming weeks.
Missed the Budget? Our teams unpack the implications for commercial real estate here, the residential market here, European prime markets here, and rural property here.
House prices
House price growth is slowing: values increased 2.4% year on year in October, down from 3.2% the previous month, Nationwide said this morning. Prices rose 0.1% during the month.
“Solid labour market conditions, with low levels of unemployment and strong income gains, even after taking account of inflation, have helped underpin a steady rise in activity and house prices since the start of the year," says Robert Gardner, Nationwide's Chief Economist. “Providing the economy continues to recover steadily, as we expect, housing market activity is likely to continue to strengthen gradually as affordability constraints ease through a combination of modestly lower interest rates and earnings outpacing house price growth.
That aligns with our view. The lender expects the changes to first time buyer Stamp Duty will lead to a jump in transactions in the first three months of 2025 (especially March), and a corresponding period of weakness in the following three to six months, as occurred in the wake of previous stamp duty changes.
In other news...
Rental homes supply will be hit by Budget stamp duty changes, say landlords (FT), New Zealand housing market bogged down by new listings (Bloomberg), and finally, US mortgage rates jump for a fifth week (Bloomberg).