Why bond markets and house prices are linked

By Tom Bill, head of UK residential research at Knight Frank Media coverage of the bond market has moved from the business pages to the front pages in recent days, which is rarely a good sign. Advertisement Government borrowing costs have risen across developed countries as investors become concerned about inflation risks and debt burdens against the backdrop of the Middle East conflict. Advertisement The UK has been under added scrutiny due to its tight financial headroom. Advertisement The yield on ten-year UK government debt exceeded 5.2% this week, which compares to a figure of just under 4.8% in the US. As a result, the Chancellor's financial buffer has shrunk to £12 billion from £24 billion. Advertisement Here's a 60-second video explaining the predicament by market analyst and Housing Unpacked regular guest, Michael Brown. It's not a good signal for mortgage rates either and the expectation that inflation will stay higher for longer is the key reason they have also risen. Advertisement We learned this week that the number of mortgage approvals in July was the lowest figure since January 2024, primarily due to rising borrowing costs since the Middle East conflict began. Although that will eventually begin to weigh on sales volumes, activity this summer has been relatively robust so far. The number of transactions in July was only 1% down on last year and 4% up on the same month in 2024. One reason is a change in approach from the government. Following two summers of speculation ahead of the autumn Budget, the new administration should be commended for the absence of media stories about which taxes could rise. That doesn't mean, of course, that Chancellor John Healey won't make changes to high value council tax rates in the Budget, for example. The relative calm has enabled both cash buyers and mortgage holders to activate their plans as mortgage rates have steadied, at least before the upwards pressure increased this week. Tom Bill is head of UK residential research at Knight Frank