Mortgage & Property Market Report #1

I wanted to share some recent updates about the UK economy and property market, along with our outlook for the future.

Whilst a significant reduction in the rate of inflation for June is clearly the headline maker, we’ll also be looking at and commenting on house prices, interest rates, property investment and the rental market.

The June inflation rate reduction was welcome relief for many and I’m sure none more so than Rishi Sunak, Jeremy Hunt and all the members of the MPC committee. From a static (or sticky…take your pick) 8.7% in May we saw a significant drop to 7.9%. Still way above the government’s 2% target but a welcome sign nonetheless. With many indicators suggesting a significant drop to follow in July and beyond there is growing hope that any increases in the base rate will be far less than feared and borrowing rates can now be repriced with marginal reductions around the corner. But more on rates later...

To finish off my commentary on inflation I think it would be interesting to look at one reason why 2 members of the MPC committee have voiced concern over further rate rises.

“Factory gate” or “Producer Output” inflation is a lesser scrutinised indictor of inflation or inflation to come. In simple terms, it’s the cost of making things. So how has that been this last decade? Below is a graph produced by the Office for National Statistics.

As you can see we reached an extraordinary peek in June 2022. Input PPI (cost of raw materials) at this point was 24.4% with Output PPI (cost of the produced goods) being 19.4%. It’s no surprise that this followed the war in Ukraine but other factors were also a contribution. In June 2023 “input inflation” had fallen to -2.7% and output or Factory Gate inflation to 0.1%.

This will undoubtedly have an effect on the overall rate of inflation and hence why many believe inflation will indeed continue to drop.

This leads us nicely to the future of the base rate and the effects of lower inflation on borrowing. I’m sure you are aware that the base rate has increased many times from 0.1% to the current 5%. Even with the inflation rate decreasing and expected to continue to do so the MPC chose to increase the base rate to 5.25% in August 2023. This is due to the belief that the job isn’t done yet and ultimately the markets still believe the peak will be 5.5% to 5.75%. However, just a few weeks ago they believed the peak would be circa 6.5% and hence a surge in the cost of borrowing that followed.

The fact that the base rate is expected to rise further doesn’t necessarily mean mortgage rates will continue to rise. In fact, as I write we are seeing the early stages of fixed rates falling. This is because where they were being priced against a peak in the base rate of circa 6.5% that pricing is now being based on the new expected peak of 5.5% to 5.75%. Let’s hope this does continue but we are in what appears to be unpredictable times.

The cost of borrowing obviously has an impact on house prices. The Halifax House price index provides the following recent data for July.

·       Average house price - £285,932

·       Monthly change – down 0.3%

·       Quarterly change – down 0.3%

·       Annual change – down 2.4%

It will be interesting to see how these figures continue.

On the negative side the cost of mortgages has increased significantly, and this will surely have an impact, although it should be noted that only around a third of housing is subject to borrowing. Sentiment is always a factor and whether unfounded or not there is growing pessimism in the general population.

Early indictors are that activity in the housing market is reducing no doubt fuelled by rising borrowing costs and a drop in consumer confidence. Of course this isn’t the end of the story on future house prices and a slump or crash isn’t expected by many.

So why is this? Well various reasons being cited are:

·       Demand for housing significantly outstrips supply. We all have to live somewhere and we simply haven’t, for many many years, built enough stock to cope with the growing and changing population. With construction currently in somewhat of a decline this massive imbalance isn’t going to be solved anytime soon and is therefore going to prevent any crash or major slump in prices. Most commentators suggest a 5 to 10% reduction.  

·       The labour market has been tight and looks to remain tight and is fuelling wage growth. People are unlikely to be out of work and are earning more. Therefore despite the increased cost of living there is little evidence that forced sales will be significant.

·       Higher interest rates in the short term will be offset by inflation reducing and the cost-of-living crisis easing.

·       Inflation falling should ultimately result in the cost or mortgages also reducing.

·       Rents continue to rise at a significant pace and this alone will dictate that the investment value of property continues to grow and help underpin property values in the normal sense.

So, let's look at the rental market. Why are rents rising so fast?… Faster than since records began in 2016!!

If we look at demand aspects there is much to consider. Higher costs of home ownership, high levels of immigration, a strong labour market and an increasing number of split households.

Supply has also been affected in that there are no more rental properties available than in 2016. Supply hasn’t grown more recently due to the increased cost of buy-to-let mortgages but this also follows on from the arrival of section 24 (a tax increase on landlords) that reduced profits for most but actually put many in to negative cash flow. There is also the impending home efficiency costs to be considered, increased tenants rights, increased costs of repairs. It’s fair to say landlords have received quite a kicking and little wonder the net supply of rental properties is neutral since 2016. It should be noted however that the availability of rental property is around 30% less than before the pandemic.

In the past year rents in Wales have risen 5.8%, Scotland 5.5% and England 5.1%. For new listings the picture is even worse for a prospective tenant in that the increase in asking prices for new rents, according to a market report by Zoopla, has remained in double digit growth for over 15 months.

AT THE COAL FACE

Here at Express Mortgages we have various teams who specialise in their own types of borrowing. This means our clients range from the first time buyer to the seasoned property developer borrowing millions.

Whilst the above data can be of use, it’s mainly what has happened. But what is happening right now. Well here are a few snippets from our team and contacts.

·       Changing lenders is increasing. Where many people were happy to accept their current mortgage providers offering when rates were exceptionally low, many people are now seeking out the very best deal to save every last penny. This is due to the cost of living crisis and also the current costs of mortgages.

·       More people are applying earlier for their next product to “reserve the rate” which is completely understandable. Of course we advise people to do so but with the potential for rate reductions we advise that we keep an eye on the market in case a better mortgage comes along.

·       Residential and Buy to let purchases remain subdued. This is a reflection of the market but at this time of year it is normative for the market to be quiet as many people are away with the kids or about to depart.

·       Demand for advice from our bridging and development team continues to remain strong. In particular finance for auction purchases and property below market value purchases has surged. Development funding still remains focused on conversions and refurbs rather than new build.

·       Fixed rates are showing early signs of reducing.

My thoughts... (the important bit 😉)

Like many, I can only see inflation reducing significantly... and like many, I do think the base rate will be increased although that is only because I think that is what they WILL do. What I think they SHOULD do is different. I think they should leave it alone and if it didn’t send out the wrong message... reduce it. Why?

·       It’s clear they waited too long to make significant increases and I just think what ever they feel is right is probably wrong. I accept the members do change.

·       On a more scientific basis, rate changes are known to take 1 to 2 years to have a real impact. The larger increases of 0.5% and above started August 2022. I think they should be given chance.

·       Undoubtedly the inflation has been supply fuelled in a highly significant way. Increasing the base rate doesn’t solve this part of the equation. A focus on the supply of labour would be better placed.

If I was betting man I would put money on mortgage rates quietly reducing despite base increases. That said, the past 12 months has proved to be volatile to say the least whether it be the mini budget or inflation. What’s next I ask?

I hope you’ve found this market update informative. I’m sure there are those that will agree and those that disagree with my thoughts and I’m always interested to hear other people’s views.

In the meantime, if you need advice or quotations on mortgages, bridging finance or insurance please reach out, I have a specialist on the team that can help. 

Paul

Express Mortgages is a trade name of Express Mortgage Services Ltd. Express Mortgage Services Ltd is authorised and regulated by the Financial Conduct Authority. [Reg No: 474427] Company registered in England & Wales no. 05167662

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