Recent discussions about the state of the UK property market have focused on Stamp Duty Land Tax (SDLT) rate changes, but interest rates keep playing an important role as well.
Homeowners can check out the impact of this change on property prices, by utilizing home valuation tools such as the “How Much is my House Worth?” feature from online estate agent Purplebricks.
Interest rates have been trending lower for nearly a year, as have housing prices, but the full impact of the early-2020s shift from an ultra-low interest rate environment to a higher interest rate environment may have yet to become fully reflected in property prices.
Even if prices hold steady in the years ahead, in nominal terms, when taking into account inflation during this time frame, this could still represent an extended period of declining prices, in real terms.
Higher Stamp Duty Already Placing Pressure on Prices
Since last August, interest rates, as measured by the Bank of England’s Base Rate, have fallen by 100 basis points. Considering this steady drop in interest rates, it makes sense that, earlier this year, HM Land Registry was reporting year on year house price increases in the high single-digits.
However, besides higher interest rates, another factor may have been driving these higher prices. As you may know, 31 March 2025 is when the temporary increase in the SDLT nil-rate threshold expired, and 1 April 2025 is when the prior thresholds came back into effect. In the first few months of 2025, home buyers may have been fast trying to close on deals, in order to avoid additional stamp duty.
In the months since April, we have already seen data suggesting that the SDLT changes are already having a negative impact on housing prices. Per Land Registry data, these changes had an immediate effect on prices during April, when average house prices fell 2.7% month on month. Although, year-over-year home prices are still on the rise.
More recently, in June, prices have still yet to fall on a year on year basis, but month on month, average asking prices were down by 0.3%, with declines more pronounced in more expensive UK housing markets.
Why Further Declines May Lie Ahead, Despite Lower Rates
In the months ahead, higher stamp duty, coupled with an increasing inventory in houses available for sale, could place additional pressure on prices, even if interest rates are lower now than they were nearly a year ago.
To make matters worse, more recent commentary from the Bank of England suggests that the central bank, much like its U.S. counterpart the Federal Reserve, is taking a cautious approach towards implementing further rate cuts.
If rates hold steady for too long, this could trigger a much-awaited contraction in prices. At least, that is the view of a trio of Swiss economists, who earlier this year argued how such a scenario could play out.
In a nutshell, while the UK housing market stayed relatively resilient despite a steep increase in interest rates during 2022-2023, this is because these rate hikes were preceded by a booming housing market. Based on historical data, “a preceding house price boom slows price reactions at the outset but amplifies them in the medium term,” suggesting that a “real house price contraction” could happen between now and 2027.
What This Means for Prospective Home Sellers and Buyers
Although the aforementioned thesis may sound concerning, keep in mind that the key word here is “real,” as in inflation-adjusted. Adjusted for inflation, UK house prices have already declined since 2022.
In other words, a further drop in prices in real terms may translate into only a slight decline, or even steady prices, in nominal terms. For prospective home sellers, this may be seen as a positive, a sign of the housing market normalizing rather than experiencing a sharp correction.
For prospective buyers, this may be a sign that, rather than waiting it out for a downturn that brings prices back to prior-year levels, price declines, if any, are going to be mild in nature. That said, a more severe change in prices could still be within the realm of possibility. Changes in the property market take shape slowly. Other factors, like rising inventory and decreased demand due to the SDLT changes, could still lead to the sort of correction long-awaited by those still locked out of the housing market.