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In a reversal of what took place 12 months ago, borrowing costs climbed during the Christmas break and in early January.

This time last year, rates came down due to falling headline inflation. Any positivity had faded by February as underlying inflation proved to be more stubborn than expected.

For the new government at the start of 2025, stubborn underlying inflation is just one their problems.

Markets are still digesting October鈥檚 Budget, concerned about the Treasury鈥檚 narrow financial headroom and the inflationary impact of borrowing and spending more. It has raised the prospect of further tax rises to alleviate the financial pressure.

The government鈥檚 position has been made worse by expectations the US Federal Reserve will cut rates less than expected in 2025 due to the robustness of the country鈥檚 economy and their own inflation and deficit concerns as Donald Trump鈥檚 inauguration approaches.

The 10-year UK government bond yield was trading above 4.8% last week, more than 30 basis points higher than its peak following the mini-Budget in September 2022 that forced Liz Truss from office. This month, the .

The difference between now and then is that swap rates, which are based on future rate expectations, haven鈥檛 spiked so high. Markets are pricing in two bank rate cuts of 0.25% this year and the five-year interest rate swap was still trading just under 4.5% at lunchtime last Thursday. That鈥檚 high compared to recent months but a full percentage point lower than it was in late September 2022.

That said, the upwards pressure on mortgage rates must be frustrating for lenders, who would presumably want to begin the new year with some headline-grabbing cuts.

Higher mortgage costs are not just a problem for borrowers.

For those paying in cash, which typically accounts for half of sales in the central London boroughs of Westminster and Kensington & Chelsea, there is also an impact, as the chart below shows.

First, they can help keep downwards pressure on prices. 鈥淚n a buyer鈥檚 market like this, rising mortgage rates assist cash buyers,鈥� said Stuart Bailey, head of London super-prime sales at 博鱼体育集团 Frank. 鈥淭hey become more sought-after as they are ready to act and will therefore drive a harder deal.鈥�

Cash buyers can also hesitate if a property market appears to be falling or moving sideways, irrespective of how ready they are to transact.

Average prices in prime central London fell 1% in the year to December 2024, while there was an increase of 1.2% in prime outer London.

The number of transactions in London last year was 0.5% higher than in 2023, 博鱼体育集团 Frank data shows. Activity was skewed towards the second half of the year due to falling rates over the summer and a relief bounce in October when it became clear that capital gains tax for residential property would be left unchanged in the Budget. In the final six months of last year, transactions rose 3% compared to the same period in 2023.

Overall, transaction volumes and prices were steady in 2024 but the two questions that hung over the property market were 鈥渨hat will be the outcome of the election?鈥� and 鈥渨hat will be the content of the Budget?鈥�

The key question facing buyers, sellers, and financial markets this year is 鈥渨ill the Budget work?鈥�.