UK Affordable Housing Market Update | July 2025

Market update

• June CPI of 3.6% (vs the 3.4% expectation) contrasts with the weaker May GDP growth data, higher unemployment and slower wage growth. Economists expect tax rises and a cooling economy to be disinflationary.
• Signs that businesses are passing on tax increases such as Employers NI onto prices are a factor in the higher CPI, with the fiscal policy seeming inflationary in the short to medium term.
• The BoE has been clear it expected CPI to rise in 2025 and peak in the third quarter. The relative stability in short term swaps in the last month is evidence that the market continues to expect the BoE to largely ignore this transitory bump in inflation and cut rates to 4% in August and to 3.75% later in 2025.
• Longer term rates are a slightly different story, with the 10-year swap rates moving up 13bps month on month to c. 4.7%. Conversely, the 2 and 3 year rates remain static. The 30-year gilt yield is at a lofty 5.5%.
• The trend for 2025 is a steepening of the cost of fund curve, with longer term rates rising while shorter term rates have fallen or held steady. This trend will likely continue as investors seek appropriate returns on gilts in the context of higher inflation and a challenging fiscal deficit backdrop.

Implications for clients

• A steeper cost of funds curve means more complexity in seeking to balance value and risk through an appropriate mix of funding and hedging tenors.
• Proactive hedging strategies, and tactical use of ISDAs, may become more prominent as the sector continues its reliance on bank debt to achieve the right balance of value of risk management.
• The spread between gilt yields and swap rates is unlikely to close materially soon, unless quantitative easing could be justified to shift the demand / supply balance of gilts (which feels unlikely given the current political environment and lack of an obvious market stress trigger).
• We therefore encourage clients to prepare for more proactive hedging, and we look forward to discussing what this means for funding and hedging strategy.

To learn more about our work in the affordable housing sector, click here.

For more information, please contact Paul Stevens or John Tattersall.

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