The Bank of England has reduced the Base Rate to 3.75%.
Dipping below the 4% mark for the first time in nearly 2 years (since January 2023).
Interest rate reductions have been widely called for across the housing sector, as it is perceived to positively influence demand for both New Build and RMI.
But after two particularly challenging years; how much impact will it have?
Green shoots needed in a challenging market
It is no secret that conditions are tough in the housing market.
In the first half of the year, only 82,450 new homes were completed. Thats 8% below the long-term average, and 45% below the number needed to hit the UK Government’s 1.5m new homes target. These stats are even worse for new home starts, which sit 24% below the long-term average at just 72,130 units commencing construction.
Volume housebuilders are simply not able to build at the rates that they would like because their margins are being squeezed by a number of directions (including the cost of materials, labour and regulatory load). Zoopla have released a fascinating piece of research assessing the viability challenges of New Build Housing; and this base-rate cut alone is unlikely to release those pressures.
What of the home-mover market? It’s a little murky, with the end of the Stamp-Duty Holiday driving an unnatural spike in March. But if you account for that, then housing transactions this year are broadly in line with the long-term average.
But it doesn’t feel like that on-the-ground; and understanding the health of the home mover market means we need to look a little deeper. TwentyCI data reveals that it is currently taking +8% longer to find a buyer than I did a year ago, and that +10% more sellers are reducing their advertised prices to do so.
So the market is far from “bouyant”. In the absence of government initiatives to stimulate demand (e.g. a replacement to the Help-to-Buy scheme or more sweeping changes to Stamp Duty) the cost of borrowing is being looked to as a potential answer.
Temper your savings expectations
It is important to note that the relationship between BoE base rates and mortgage rates is not one-to-one; we will not see a commensurate overnight drop by 25 basis points.
So how much impact will the rate cut really have?
Well let’s say you did manage to find a mortgage deal 0.25% lower than was on offer in November; for every £100k of mortgage this only saves around £15 a month. Equivalent to one avocado-breakfast-and-a-coffee for those millennials trying to get on the ladder; but not enough to turn the needle of affordability. For home improvers the savings are lower still; a £30k loan will now cost about £3 less each month to service.
Vibes over viability?
Mortgage lenders have responded, and it is now possible to lock in some fixed-term products at the 3.5% to 3.6% range.
The rate reduction also paves the way for further cuts in 2026 with commentators suggesting next year will end around the 3% to 3.25% range.
Not only does this make it cheaper to borrow, but it also makes it less attractive to save. At the same time, the slowing rate of inflation is giving wages a chance to catch up. Wage growth is currently outstripping inflation, and Google Trends suggests that “Cost of Living” search traffic is just 5% of its Winter 2022 peak.
Over time, this builds the confidence needed to take out loans or dip into savings, to invest in homes or move. It is that confidence that the market is betting on.
However, the economy is not out of the woods. Whilst wages may be outstripping inflation, unemployment is a growing challenge. Unemployment has risen to 5.1% nationally, and is particularly acute amongst 16-24s where it has reached 15% according to Statista. This has two key implications for New Homes and RMI: 1) fewer people at the start of their careers, rising up the paygrades towards home ownership. And 2) more “boomerang” kids, adults living with their parents later into their 20s and 30s, impacting the willingness or ability of older home-owners to invest in their homes or move.
A positive development but not a game changer
For house builders and those involved in residential RMI, the base rate cut is a positive development in a challenging climate. But it is unlikely to open the floodgates to rapid growth.
Further cuts in 2026 will be welcomed, but to really dial up output we need to tackle the viability challenge at its roots: 1) Reduce the cost of building. 2) Stimulate affordability.
Even given the announcement, Barbour ABI expects modest growth in 2026. Join us on the 13th January to hear more about the outlook for the next few years.
