The growing uncertainty is weighing on buyer confidence, with fresh figures from Knight Frank showing country house prices have fallen 4.2% over the past year.
Meanwhile, mortgage borrowing costs have reached their highest level in three years, raising concerns about a further slowdown in transactions.
The average five-year fixed mortgage rate hit 6% this month, its highest level since September 2023, according to Moneyfacts.
Bank of England figures show mortgage approvals were 14% below their five-year average in August. Property transactions were broadly flat against the same benchmark, according to HMRC.
Tom Bill, head of UK residential research at Knight Frank, said: “As the political sands shift, a more pressing issue for anyone buying or remortgaging is the high cost of borrowing.”
He said mortgage rates had climbed since the Middle East conflict began in February, pushing inflation expectations higher.
“Mortgage offers last for up to six months, which means the financial impact of higher rates filters through to the market gradually,” Bill added.
He warned that transaction numbers were likely to fall during the final months of the year.
Mortgage offers issued before the conflict have now expired, exposing more buyers to higher borrowing costs.
The latest RICS survey also points to weakening housing market momentum. Meanwhile, Lloyds reported no annual house price growth in September.
Property tax divides political parties
The market slowdown comes as political parties adopt sharply different positions on property taxation ahead of the Budget.
The Conservatives have pledged to scrap the proposed council tax surcharge on homes worth £2m or more. They have also announced plans to abolish inheritance tax on primary residences.
Labour is pursuing higher taxes on expensive properties, while Reform UK has expressed opposition to new taxes without committing to reverse the proposed surcharge.
The competing policies have added to uncertainty for buyers and sellers, particularly at the upper end of the market.
Further mortgage rate pressure?
Inflation concerns linked to the Middle East conflict could keep borrowing costs elevated.
Market analyst Michael Brown said attention had shifted from crude oil supplies to shortages of refined products, particularly diesel.
“The problem the world has at the moment is there is enough crude oil but there’s not enough things that we get from crude oil to go round, particularly diesel,” he said.
Brown suggested that every $5 increase in crude oil prices was prompting markets to price in another five basis points of interest rate rises.
However, he questioned market expectations of four or five Bank of England rate increases by the end of 2027.
Instead, he anticipated a quarter-point rise to 4% in November.
Country house prices fall 4.2%
Knight Frank’s latest figures show the impact of higher mortgage rates and political uncertainty on the country house market.
The firm’s Country market covers urban and rural properties valued above £750,000 outside London.
Average prices fell 4.2% in the year to September. That marked a modest improvement on the 5% annual decline recorded in June.
However, transaction activity continued to weaken.
Property exchanges fell 2% in the third quarter compared with the same period last year. The number of offers made declined by 10%.
James Cleland, head of Country sales at Knight Frank, said: “Whilst well-priced properties are generating good interest, overall sentiment is brittle due to the uncertainty of what will be in the Burnham administration’s first Budget, on top of rising mortgage rates.”
He added: “With concern about which taxes may or may not rise in the Budget later this month, buyers and sellers are struggling to find a steady footing.”
