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How do rate cuts impact house price growth?

Journalist: John Choong (Head of Markets and Research), Newspage

ended 07. August 2024

With the first Bank Rate cut set in motion last week, this now begs the question of what this could mean for the future of house prices. Given that the bulk of home purchases are reliant on a mortgage, this should naturally bode well for house prices, as the expectation is that more people can now afford to borrow money in order to buy a house. Hence, it's no surprise to see the inverse relationship between the Bank Rate and house price growth over the past two decades.

There are, however, exception to this trend. Most notably, these tend to occur during recessions or big economic shocks. These can be seen following the implosion of the Dot Com and housing market bubbles in 2001 and 2008, as well as the COVID-19 pandemic in 2020 and 2021.

As such, it's not always a guarantee that house prices will go up every time interest rates drop, as the reasons for rates dropping may be instigated by a recession or recession risks. That said, the odds of a deep recession hitting the UK look to be slim for the time being. Q1 GDP growth (0.7%) was the UK's strongest quarter of economic growth (ex. pandemic) since Q3 of 2019. More encouragingly, the Bank of England (BoE) even doubled its GDP forecast for the year, as it now projects annualised GDP to come in at 2% in Q4 this year, a level not achieved in more than half a decade (ex. pandemic).

On that basis, house prices should continue to rise in H2, as the winds seem to be blowing in the right direction. The latest Nationwide House Price Index just reported that the average house price grew by 2.1% in July, finally breaching the 1% threshold, and saw the fastest growth rate since December 2022.

The cost-of-living crisis is showing signs of dissipating as well, with inflation now back to the BoE's 2% target, and real wage growth still positive. This is encouraging considering the fact that wage growth continues to outpace house prices, allowing for the average house price to earnings ratio to remain at 2019 levels. Consequently, both consumer and business confidence have continued to rebound over the past few months.

But perhaps most crucially, appetite for home buyers remains healthy. Taking into consideration that mortgage approvals have a pretty successful record in rising after an election as well, the starts are aligned for the housing market for the rest of the year. In fact, current forecasts see mortgage approvals rising to as much as 63k by December. This would mark a c.5% rise in approvals, which is consistent with our research, which found that mortgage approvals rise an average of 4.4% in the 3 months after an election.

What's more, mortgage lenders are now reintroducing higher loan-to-value products onto the market and reducing mortgage rates. This could have further scope for reductions, especially if services inflation cools more than forecast, thereby triggering more rate cuts. Thus, with inflation cooling rather than a recession driving potential future rate cuts, annualised house price growth could potentially even reach as high as 5% by the end of the year.

A list of responses from industry experts can be found below.

7 responses from the Newspage community

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Simon Bridgland
Director at Charwin Private Clients
If plates can be kept spinning, then I feel the remainder of this year will continue on its current trajectory, with a solid amount of positive house price growth.

However, with a UK Budget on the horizon, Rachel Reeves has the potential to throw a spanner in the works. The hidden-in-plain-sight tax rises are likely to have an impact on house prices, in part by the diminishing number of tenanted properties in the private rental market continuing to fall.

If a significant amount of properties do become available during the latter part of the year, it could translate in lenders revving up the engines of lower rates on higher loan to value products, which would give increasing leverage for first time buyers.
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Dariusz Karpowicz
Director at Albion Financial Advice
The correlation between rate cuts and house price growth is clear: as rates decrease, house prices tend to rise due to increased buying interest. My prediction is that if the Bank of England continues to cut rates, we will see house price growth pick up pace, likely returning to the robust growth we've observed in previous years.

The reintroduction of higher loan-to-value products, including 100% mortgages, is a positive step for first-time buyers. This increased accessibility will likely drive more demand and, consequently, push house prices higher.

However, several risks could derail this positive outlook. Geopolitical tensions, such as potential conflicts involving Iran or the ongoing Russia-Ukraine war, could create global economic instability. Additionally, economic troubles in major economies like Japan could have a ripple effect, impacting the UK and other markets. These factors could dampen the housing market's recovery and growth.
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John Choong
Head of Equities and Markets at Interpretiv
It's not always a guarantee that house prices will go up every time rates drop, as the reasons for rates dropping may be instigated by a recession. That said, the odds of a UK recession look to be slim in the near term, as the Bank of England recently doubled its GDP forecast for the year, projecting annualised GDP to come in at 2% in Q4.

On that basis, house prices should continue to rise in H2, as the winds blow in the right direction. Both the latest Nationwide and Halifax data reported that house prices grew by more than 2% in July, finally breaching the 1% threshold.

That said, risks remain. This Monday's major sell-off in equities and major currencies may have dented confidence, with buyers being more reticent despite swap rates declining further. But with the worst looking like it has passed, I'm encouraged that house prices will continue their upward momentum, with annualised growth potentially reaching as high as 5% by the end of the year.
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Michelle Lawson
Director at Lawson Financial
We must exercise caution when considering historical trends, as outcomes do not always replicate past patterns.

We are approaching a significant market shift with interest rates declining. Therefore, it is expected that home buyers will enhance the efficiency of supply and demand dynamics, potentially driving up prices.

Consequently, prospective buyers should seriously consider making a purchase sooner rather than later. Delaying to accumulate a larger deposit may result in house prices increasing more than the additional savings accrued.
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Stephen Perkins
Managing Director at Yellow Brick Mortgages
With mortgage rates easing and potential buyer numbers increasing due to growing confidence, competition will heat up and turn the market on its head to become a sellers market. After all, recent data has shown a peak in properties available on the market. As such, I expect demand to continue to outstrip supply with prices continuing to swell.
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Ben Perks
Managing Director at Orchard Financial Advisers
As rates lower, it allows borrowers to loosen their belts and spend a little more. It also makes getting on the property ladder, and moving up it, more attractive. Historically, we see that bouyant market conditions and competitive rates have caused an uptick in property value.
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Chris Barry
Director at Thomas Legal
Declining interest rates have a dual effect on the property market. Firstly, it increases demand as more people can afford to borrow more money. And secondly, those with large savings balances receive less interest income and start to look at other ways to invest their money to gain a better return which property often offers as an attractive alternative.

This, together with the ever growing supply shortage and real wage growth over the past year, should see house prices increasing by as much as 5% in 2024.