A view from London

Second, house prices in London and the south have underperformed the rest of the UK in the last couple of years. House prices in the South East, South West and London have fallen by 1%-2% since early 2023 while prices in Northern Ireland, Scotland, Yorkshire and the Humber, the North West and North East have risen by 6%-14%. This reverses the trend of outperformance by the south that had been in place since 2010. Higher interest rates have hit southern households which tend to have larger mortgages relative to their incomes. This has squeezed housing activity and prices most in areas with the highest house prices.

Third, the pandemic ‘race for space’ that led buyers to opt for larger properties seems to be unwinding. The FT reports that nearly 20% of the homes on the market so far this year were purchased in 2021 and 2022, well above the 12% share that homes owned for three and or four years normally account for. Lucian Cook, Savills’ director of residential research, says that return to the office mandates and the realities of long commutes mean that moving further from work has become a more daunting prospect.

Fourth, more people own their homes outright, but fewer have mortgages. Most of the large cohort of households that bought property in the 1980s and 1990s have paid off their mortgages, lifting the proportion of the adult population who are outright homeowners from 25% in 2000 to almost a third today. Meanwhile the inflow of people into home ownership has slowed. High house prices and tougher criteria for mortgage lending mean that the proportion of adults with a mortgage fell from 36% in 2000 to 24% in 2023. As a result more people are renting, and over half of those aged 19-29 live with their parents.

Fifth, mortgages are getting longer. 25-year mortgages were once the norm. Today half of new borrowers take on a mortgage with a term of 30 years or more, up from just 12% in 2005. New mortgages with terms of 40 years or more, which were almost unknown at the turn of the century, now account for just under 10% of new mortgage lending.

Sixth, mortgage rates are at their lowest level for nearly three years. The average two-year mortgage rate fell below 5.0% for the first time since September 2022 last week, having been close to 7.0% in 2023. The Bank of England has cut interest rates from 5.25% to 4.0% in the last year and mortgage rates have drifted lower in response. This is good news for new buyers. However, just as fixed-rate mortgages delay the transmission of rising interest rates to mortgage payments, so they slow the pass through of interest rate cuts to existing mortgage holders. The Bank estimates that due to lags in mortgage refinancing, reflecting the length of fixed-rate deals, many borrowers will see their mortgage rates rise when they refinance. Thus, despite interest rate cuts, the average mortgage rate paid by UK households is set to rise, not fall, over the next 12 months.

PS: Last week’s briefing concluded that tariffs are yet to fully feed through to US businesses and consumers, with a more complete picture likely to emerge in the coming months. In the meantime, three additional points warrant consideration.

First, president Trump’s executive order to extend the tariff truce with China for another 90 days has averted a return to tit-for-tat tariffs, which previously saw US levies of up to 145% on Chinese goods. While the news caused global stock markets to rally last week, the extension leaves the vexed question of US-China trade relations unsettled.

Second, the pharmaceuticals industry faces significant uncertainty about US tariffs. Pharmaceuticals are currently exempt from US import tariffs pending an investigation into the sector, which Mr Trump has hinted could result in tariff rates on pharma products reaching as high as 250%. Higher rates on pharmaceuticals would increase the average US tariff for a number of European nations where pharmaceuticals make up a large share of exports to the US. For Ireland, Denmark and Switzerland, pharma accounts for 40%-50% of exports to the US.

Third, as part of efforts to win over the US administration many countries and companies have pledged to step up purchases of US products or investment into the US. We’d be cautious in interpreting some of the numbers that have emerged. The newly signed US-EU trade agreement, for instance, projects €750 billion in EU purchases of US energy products and €600 billion in investment by 2028. Details of how the EU will triple energy purchases are unclear while the €600 billion investment is based on the private sector’s future investment intentions, as opposed to publicly funded, and therefore state-controlled, investment.