Bond yields crush Chancellor Reeves's building boom dreams

The UK Chancellor, Rachel Reeves, is relying on a building boom to balance the books but high interest rates and borrowing costs are threatening her plans. UK borrowing costs have risen more than other major economies, with investors worried about the future of the UK economy. This is impacting the real estate market as investors price their loans based on the gilt market, with higher borrowing costs and volatility making property less attractive.

The UK Chancellor, Rachel Reeves, has been banking on a building boom to help balance the country's fiscal books, but high interest rates and borrowing costs are posing significant challenges to her plans. According to the Telegraph, UK borrowing costs have surged more than those of other major economies, with investors increasingly concerned about the future of the UK economy [1].

The post-financial crisis era of cheap cash and rock-bottom bond yields has come to an end, making it more difficult for Reeves to achieve her dreams of a building boom. Since September 2022, UK borrowing costs have risen more than in other major economies, with CBRE data showing that only Japan has added more to its debt share among G7 nations [1].

The uncertainty surrounding the UK economy has pushed up long-term borrowing costs. The Bank of England, which was a major buyer of UK government bonds during the pandemic, has now switched to selling them, further increasing borrowing costs. This shift is causing concern among investors and housing associations, who are finding it more expensive to borrow and invest in infrastructure projects [1].

Investors in big infrastructure projects price their loans based on the gilt market, or the "risk-free rate." The higher borrowing costs and volatility in the property market have made property less attractive to investors. Nuwan Goonetilleke at Standard Life, which manages £290bn in assets, has noted that investments that made sense a decade ago no longer do today [1].

The higher interest rates have also led to a chilling effect in the housing market. A recent study by the Home Builders Federation found that at least 139 home building sites are currently delayed due to constraints [1]. The Bank of England's quantitative tightening (QT) has pushed up borrowing costs, making it more expensive for housing associations to provide homes for those in need [1].

Despite the challenges, all hope is not lost. Goonetilleke believes that if the UK can find a sustainable path to growth and stable inflation, it could help anchor investment in the property market. However, the current economic climate makes this a challenging task [1].

In addition to the rising borrowing costs, the Bank of England's rate cuts have had a limited impact on households. According to Business Times, Britons are £11 billion worse off than a year ago despite four interest-rate cuts and the prospect of more to come [2]. The savings index compiled by GfK has surged to the highest level since 2007, indicating that consumers are hoarding money rather than spending it due to fears of tax hikes [2].

The UK central bank is expected to deliver a fifth quarter-point rate reduction to 4% on Thursday, but the governor Andrew Bailey is likely to emphasize caution over the pace of future easing due to concerns about inflation and the labor market [2].

In conclusion, the UK's building boom is threatened by rising interest rates and borrowing costs, which are making property less attractive to investors and increasing the cost of borrowing for housing associations. The Bank of England's quantitative tightening and rate cuts have had limited impact on households, and the UK economy is facing significant challenges.

References:
[1] https://www.telegraph.co.uk/business/2025/08/04/sky-high-bond-yields-crushing-reeves-dreams-building-boom/
[2] https://www.businesstimes.com.sg/companies-markets/banking-finance/bank-england-rate-cuts-deliver-ps11-billion-hit-households