US midterms could hit UK housing market more than the Budget: Knight Frank – Mortgage Strategy

The outcome of November’s US midterm elections could have a greater influence on the UK housing market than last month’s Budget, according to analysis by property consultancy Knight Frank.

The firm added that growing hopes of a diplomatic agreement with Iran raise expectations of lower inflation and borrowing costs.

A potential breakthrough in the Middle East conflict could ease inflation and mortgage rates, offering a much-needed boost to the UK housing market, Knight Frank went on.

Tom Bill, head of UK residential research at Knight Frank, said the political fallout from a disappointing performance by Donald Trump’s Republicans had increased pressure on the US president to find a resolution to the conflict.

Financial markets are increasingly pricing in the prospect of a deal with Iran, helping to drive oil prices down by 16% last week and ease inflation expectations. The shift has already prompted some mortgage lenders to reduce their fixed-rate products.

A lasting peace agreement could accelerate the decline in borrowing costs, potentially having a greater impact on the housing market than measures announced by Housing Secretary John Healey in October. These included the Your First Home scheme, changes to biodiversity net gain requirements and the first-time buyer ISA.

The prospect of lower rates comes at a critical time for the property market, which has been struggling with higher mortgage costs since the conflict began in February.

Lloyds reported last week that UK house prices fell by 1.2% in the year to October, the largest annual decline in three years. Meanwhile, Bank of England figures showed mortgage approvals in September were 19% lower than the same month last year.

The figures highlight how developments in Washington, rather than Westminster, have played a significant role in shaping the UK housing market this year, according to Knight Frank.

Speaking on Knight Frank’s latest Housing Unpacked podcast, Bill discussed the outlook with Damian Pudner, economist and co-founder of the Great British Think Tank.

Pudner said the US midterm elections had fundamentally altered the political incentives facing Trump.

“The American midterms have changed the political backdrop, and Trump has much stronger incentives now to bring the conflict towards some kind of resolution,” he said.

A diplomatic breakthrough could have significant economic consequences, with lower oil prices helping to reduce inflationary pressures and create room for interest rate cuts.

“Oil prices will stabilise at a much lower level, inflation expectations will fall across the globe, and that will hopefully bring interest rates down,” Pudner added.

Financial markets have already begun to respond.

Five-year SONIA swap rates closed at 4.52% on Monday, although they rose above 4.6% on Wednesday amid renewed uncertainty over the prospects for a peace agreement. This compares with 4.77% three weeks earlier.

Investors are also scaling back their expectations for further interest rate increases. Markets are now pricing in approximately three rate hikes in 2027, compared with expectations of almost four at the end of October.

Pudner believes markets remain too pessimistic about the interest rate outlook and argues that the Bank of England should look through the temporary oil price shock.

“I’m not seeing any feed-through into wages or particularly strong inflation expectations rising in financial markets,” he said.

He described the Bank’s decision to raise interest rates by 0.25 percentage points to 4% as an insurance measure, adding: “But I do think it was a mistake and I think they should have held the line.”

While the prospect of lower borrowing costs offers some encouragement, London’s prime residential markets continue to face challenging conditions, according to Knight Frank.

Average prices in prime central London fell by 2.1% in the year to October, marking three and a half years of annual price declines.

The market has remained under pressure despite the absence of direct sales tax increases in this year’s Budget. High stamp duty costs, combined with uncertainty over the long-term replacement for the non-dom tax regime, continue to weigh on demand for higher-value properties.

However, there are signs that greater political and economic clarity could help restore buyer confidence.

Stuart Bailey, co-head of Knight Frank’s London Private Office, said: “There is a reasonable amount of clarity on the horizon now that the Budget has happened and the mood music in the Middle East is de-escalatory.

“Despite the upfront stamp duty costs (which have a significant impact in a stable growth market), this period of relative calm means buyers can increasingly make longer-term decisions.”

Prime outer London (POL) is also experiencing falling prices, with higher mortgage costs increasingly affecting buyers in a way that reflects conditions across the wider UK housing market.

Knight Frank’s figures show average prices in the area fell by 0.7% in the year to October, representing the steepest annual decline since June 2024.