The UK housing market is showing signs of improvement despite the recent softening of interest rate cut expectations

Strong wage growth is fuelling underlying inflation, and this is pushing mortgage rates higher – at least in the short-term.

Tom Bill, head of UK residential research at Knight Frank, commented: “The initial New Year optimism was sparked by a sharp fall in the cost-of-living in the final quarter of 2023. However, private sector wage growth in Q4 last year was ahead of expectations at 6.2% we learned this month.

“It means the bank rate is likely to stay at 5.25% at the next two meetings of the Bank’s Monetary Policy Committee (MPC) on 21 March and 9 May.”

As expectations of a cut move further into the distance, the result for the UK housing market is that more lenders have nudged mortgage rates back above 4% in recent weeks.

The five-year swap rate topped 4.3% last Thursday morning, which compares to less than 3.6% in the period between Christmas and the New Year. The word that comes to mind is “ouch”.

Bill points out that Goldman Sachs tempered its outlook last week when it said it expected a cut in June rather than May due to the resilience of the labour market.

Despite the tougher lending landscape, the housing market has been on an upwards trajectory since the autumn, as the chart below suggests.

“The signs are positive and demand indicators are heading in the right direction ahead of the spring market,” said James Cleland, head of the Country business at Knight Frank. “Many buyers are cautious about the wider economic environment and, as the last two months have reminded us, realistic pricing is key.”

“We had strong expectations towards the end of 2023, however the market has been slower out of the blocks than anticipated,” said Rory Penn, head of London sales at Knight Frank. “The signs are pretty clear though that this year will be stronger than 2023 with offer levels up and buyer sentiment improving.”

Underlining the resilience of demand, the number of offers made across the UK in January was 7% higher than last year, Knight Frank data shows.

“It’s a frustrating period for mortgage lenders,” said Simon Gammon, head of Knight Frank Finance. “They are keen to build their mortgage books but are feeling hamstrung by what is happening in the swap market. Their margins are already thin, which means they have to respond quickly when rates rise.”

So, while the UK housing market is heading in the right direction, some of the spring has gone from its step since the early days of January.

“We had strong expectations towards the end of 2023, however the market has been slower out of the blocks than anticipated,” said Rory Penn, head of London sales at Knight Frank. “The signs are pretty clear though that this year will be stronger than 2023 with offer levels up and buyer sentiment improving.”