Inflation data proves inconclusive for UK housing market

The headline rate of inflation fell from 7.9% to 6.8% in July, which was largely as expected and therefore difficult to get too excited or despondent about.

Meanwhile, the core inflation reading that everyone had been monitoring so closely was unchanged at 6.9%. Was no news good news or bad news? It felt more like the latter.

Both numbers came a day after employment data showed annual wage growth was 7.8% in Q2, the highest figure since records began in 2001. While that was clearly a negative, it was a slightly historical one.

So, what to make of it all?

The drop in inflation provided a faint light at the end of the tunnel but the Bank of England is unlikely to feel its job of raising rates to tackle inflation is done quite yet, despite growing questions over the effectiveness of the approach.

Financial markets certainly seemed to think more hikes were coming. The five-year swap rate was trading above 5.4% last Friday after starting the week at below 5.2%. Not a huge movement but the wrong direction for anyone buying or re-mortgaging.

What mortgage lenders do next is less straightforward to predict though.

Despite the upwards pressure from the swap market, a number lowered their rates last week. Following better than expected inflation numbers in June, downwards momentum had begun to gather pace in recent weeks.

While some may now hit the pause button, they face other pressures in a low-volume housing market. The number of mortgage approvals was a fifth below the five-year average (excluding 2020) in June.

“Last week felt inconclusive and the overall mood is hesitant,” said Sanvir Dhillon of Knight Frank Finance. “The issue for lenders is that the longer this goes on, the more pressure they will come under to lend, even at lower margins.”

The bigger high street lenders are less reliant on the vagaries of the swap market and more likely to keep cutting rates, even marginally, added Tim Woods of Knight Frank Finance.

“It’s a confusing picture at the moment for borrowers,” said Tim. “Anyone who is trying to get a mortgage really needs a broker. If you’re doing it on your own, by the time you’ve decided and booked an appointment, the rates will probably have changed anyway.”

Perhaps September will bring more clarity.