Knight Frank says a reduction in mortgage costs as early as February – or perhaps more likely in Q2 next year – could trigger a housing market bounce.

The agency, which also has a mortgage arm, says there’s no shortage of reasons for buyers and sellers to feel hesitant at the moment.

This follows mortgage rates having tripled in three years, uncertainty over where bank rate will peak, political volatility and two major overseas military conflicts taking place. Sentiment has been sapped to the extent that the seasonal autumn bounce in the UK housing market was non-existent this year, KF says.

However, despite a 20 per cent drop in trading volumes, more positive signs have begun to emerge according to the agency.

Most notably, inflation fell by more than expected, declining to 4.6 from 6.7 per cent. Underlying inflation, which has been driven by a strong jobs market and is the Bank of England’s biggest headache, also beat expectations by cooling to 5.7 per cent.

Knight Frank believes that is undiluted good news for anyone buying or re-mortgaging as the BoE’s task of taming inflation by raising rates feels closer to completion.

The BoE could even start cutting rates as soon as next February according to the Wall Street bank Goldman Sachs. Admittedly this would be in response to a weaker-than-expected economy, but Q2 next year was the most likely time for a cut, the bank has added. 
As evidence of improved times, Knight Frank Finance says the cheapest five-year fixed-rate mortgages have fallen from over 5.0 to almost 4.5 per cent in two months.

However, with the five-year swap rate not much lower than that, margins are getting thin for lenders keen to do business in a low-volume housing market, says Simon Gammon, head of Knight Frank Finance.

“The recent rate drops show lenders are feeling more positive about the outlook and there is an impact beyond the cut. Lower rates mean lenders have more opportunities to help borrowers which itself will lead to a more liquid and competitive lending market.”

He believe that as mortgage costs fall, a seasonal bounce next spring gets more likely. That said, while economic uncertainty recedes, political and geopolitical risks remain.

A general election campaign tends to create a national mood of uncertainty while any escalation of the conflict in the Middle East could prove inflationary if energy markets are rattled, which would put upwards pressure on rates again. The outlook for the UK housing market is certainly improving but next year won’t be hurdle-free.