Disagree

This week's house price data gave us the familiar spectacle of two "official" indices disagreeing, competing over which version of reality to paint. Lloyds, still reporting under their Halifax name, showed UK house prices falling 0.4% year-on-year in August, the first annual drop since November 2023. Nationwide, however, reporting just days earlier, showed 1.6% annual growth. Same month, same country, opposite headlines.

Both lenders pointed to the same explanation: mortgage rates. The average two-year fixed rate has climbed to 5.59%, up from 4.83% in late February, before the US-Iran conflict sent gilt yields and the swap rates that price fixed-rate mortgages roaring sharply higher. Thirty-year gilt yields, like household thermometers, hit their highest level since 1998 this summer, a genuine shock that is squeezing residential buyers.

It is also largely beside the point for anyone financing development rather than buying a finished home.

Retail mortgage pricing and development finance pricing are not the same market wearing different clothes, as many assume; they are priced off different curves, react to different inputs, and, perhaps this is the bit that gets lost in the commentary, have moved very differently over the past six months. A two-year fixed mortgage is priced primarily off swap rates: the market's forward view of where interest rates will sit over the life of the deal, plus a lender margin, plus whatever term premium investors are demanding to hold gilts for that long. When something like a Middle East conflict spooks the bond market, it is the long end, the multi-year expectations baked into swaps and gilts, that moves first and hardest. That is exactly what has happened: thirty-year gilts at a 1998 high is a term-premium story, not a base-rate story. Now that’s not to say that we aren’t aware of the dangers of a slowdown of end buyers, but this week, this is just a story about building houses.

Development finance, by contrast to the above, is overwhelmingly priced off short-term reference rates, base rate or SONIA plus a margin, on facilities that typically run 12 to 24 months to practical completion. It is not exposed to the market's fifteen-year view of anything. It is exposed to where the Bank of England actually sets rates, month to month, for the duration of the build. And the kicker is that the Bank of England's base rate has not replicated the swap market's dash upward. It sits at 3.75%, with the next MPC decision due on 17 September. The debate ahead of that meeting is whether a previously expected cut survives, not whether rates are about to spike, and this isn't a pedantic distinction. It has real consequences for how developers and lenders should be reading the current environment.

If you are a developer watching mortgage-rate headlines and concluding that development finance has become dramatically more expensive since February, you are pricing your project against the wrong curve.

Development lending costs, tracking a base rate that has moved far less than swap-implied mortgage pricing, have been considerably more stable through this shock than the retail narrative implies. If you are an investor reading "mortgage rates near 5%" and inferring that returns on development lending must be moving in lockstep, the same correction applies. Loan books priced off SONIA or base rate plus margin are not riding the same geopolitical rollercoaster as a first-time buyer's fixed-rate offer. None of this means development finance is immune to macro shocks; it isn't. A sustained period of "higher for longer" base rates, should the MPC hold or even reverse course on cuts, would eventually feed through to development pricing, just as it always has. The point is narrower and more useful than "nothing has changed": the transmission mechanism is different, the timing is different, and right now the two curves have genuinely decoupled. Conflating them means developers either overestimate their financing costs and shelve viable schemes, or investors misjudge how exposed development lending returns are to this particular shock.

There's also a second layer here worth connecting: part of why Lloyds and Nationwide are producing such different pictures of the same month is that the mortgage-rate pain is not evenly distributed; it bites hardest exactly where buyers are most leveraged and most rate-sensitive, which skews toward particular regions and price bands rather than the market as a whole. A national HPI, whichever provider compiles it, averages across a market that is currently behaving less like one market and more like several. Development finance underwriting has always worked at the opposite level of resolution: site by site, scheme by scheme, borrower by borrower. A lender assessing GDV, build cost inflation and exit strategy on a specific scheme in a specific location was never going to be well served by a single national index in the first place, and that's arguably more true now, when the index itself can't agree with its closest competitor on the direction of travel.

So what's the takeaway this week for us? The headline rate that dominates property coverage this autumn, the one climbing toward 5%, is the wrong rate to watch if you're financing a development rather than buying a home to live in. Base rate, not swap rate, should drive decisions on scheme viability and lending appetite over the next 12 to 24 months. Given the gap that has opened up between the two, that distinction is currently worth rather more than a footnote.

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