Steve Goodall is managing director of e.surv
As we emerge from the summer and look toward the last quarter of this year, our own experience of the Scottish housing market suggests that notwithstanding the withdrawal of the stamp duty tax, there is a lot of activity left as we roll into Q4. This year then will have been very good for many reasons – many of which no-one expected to deliver the kind of work volumes and changes in behaviour we ended up seeing.
The question preoccupying most minds will be what is the likely shape of the mortgage market next year? Of course, there is an exhaustive list of dynamics but surely the most significant is the impact of rising interest rates on the housing market.
The FT in September reported that economists are expecting rises in US interest rates to come more quickly than the Federal Reserve might otherwise believe as it endeavours to wind down the stimulus resulting from the pandemic. According to their survey just over seventy percent believe rates will rise in the US by one quarter of a percent in 2022.
It was Klemens von Metternich, the distinguished 19th-century diplomat, who famously said “When America sneezes, the world catches a cold.” While the UK’s future is not entirely joined at the hip with the US, in a global economy there is little escaping many of the same dynamics at play (not to mention the impact of our cooling relations with Europe).
More importantly the recent flurry of job statistics, the reality that many furloughed workers are already working part-time and will not return to make up the job deficit, and the pressure on prices for everything from food to second-hand cars, means there are many forces fanning the flames of inflation.
It’s a brave person who would bet against a rise at any time of next year. Price rises have seen the biggest jump since records began in 1997 as the economy continues to reopen. Official figures show that the increase in the cost of living, as measured by the Consumer Prices Index, hit 3.2% in the year to August.
According to the Office of National Statistics, the unemployment rate now stands at 4.6%, in line with economists’ forecasts. The fall was powered by a record August for hiring, with well over 200,000 employees added to payrolls in the month. If labour shortages continue to persist, wage inflation – the like of which has been eye-watering in some industries such as haulage already – will mean the Bank of England will be left with no choice but to pull the metaphorical trigger and raise rates.
Where does all this lead? One might be tempted to suggest that politicians do not need to put family finances under stress right now. You cannot inflate sovereign debt away with high interest rates either.
But the Bank of England’s own quarterly survey in August revealed a fall in the number of consumers who believe the bank was doing enough to keep a lid on inflation. Only a third believed the bank was doing a good enough job in keeping inflation under control - the lowest level since the survey started in 1999.
The stage is set perhaps for things to change. If we too are to see a rise in interest rates we should expect to see a few things fall into place.
The first is that house prices, I suspect, will not be unduly affected as the supply remains chronically short and, if our experience of prices in Scotland is anything to go by, a lack of supply in key markets will not deter those keen to find a place in the right area with outside space.
The second is that confidence and household finances may come under strain but that will prompt a robust bout of remortgaging and where that is not possible some product transfers. Fixed rates will become very popular once again.
It will also mean affordability will remain a real issue for borrowers and so this will force an extended bout of higher LTV borrowing as buyers seek to get onto the property ladder and those seeking to move endure more difficult stress tests.
This prompts an interesting question for me as a surveyor and valuer - how will the robustness of property prices be further required to underwrite individuals who want to borrow but whose circumstances are complex?
Traditionally our confidence in house prices has meant very few are worried at lending sub 70% but if maintaining market share becomes reliant upon higher LTV lending the current and likely future value of the property may become more crucial to the process. With an ageing housing stock, and more complex borrowers needing larger LTV loans, understanding the value of the asset and the nuances may become more important than many in the industry might like to admit.
