While the economic signs are encouraging, the jury is out on what lies ahead…
Put up the bunting, open the champagne and crank up the tunes… UK house prices have grown strongly and the UK inflation rate has fallen, potentially setting the scene for another base rate cut – possibly even two – before the end of the year.
Brokers and lenders could be forgiven for thinking all is well in the world (give or take the odd geopolitical concern), and certainly a lot more positive than they were looking even a few months ago, but is it too early to party like it’s 1999? Is further market volatility still a real prospect?
Joela Jenvey (pictured left), an independent mortgage and protection consultant at Nurture FS, told Mortgage Introducer that a reduction in inflation to 1.7% in September, down from 2.2% in the previous month, would be perceived by mortgage borrowers as a sign of greater stability in the economy, and potentially improve confidence for home movers and first-time buyers.
The house price growth reported by the Office for National Statistics, showing an increase of 2.8% in the 12 months to August (a rise of £8,000 on an average property price of £293,000) might also be encouraging, Jenvey noted, especially for home movers looking to upsize or downsize, as it suggests demand in the housing market.
“However, the relationship between inflation, mortgage rates, and housing prices can be complex,” she cautioned. “While lower inflation could lead the Bank of England to reconsider its stance on interest rates, recent fluctuations in swap rates reflect broader economic uncertainty at home and abroad.
“If inflation continues to trend downward and economic indicators remain stable, we might see a downward trend in mortgage rates in the medium to long term. However, if inflation remains stubborn or if economic conditions change unexpectedly, further rate increases could be on the table.”
Ultimately, while there’s cautious optimism, Jenvey concluded, the situation remains fluid. “Many factors at home and abroad could influence the path of mortgage rates in the near future,” she said.
Is inflation falling below target necessarily good news?
Gerard Boon (pictured seco nd from left) managing director at Boon Brokers, observed that even though the sharp fall in the inflation rate might appear encouraging, it could concern the Bank of England’s Monetary Policy Committee (MPC) because it is below their 2% target.
“After the MPC change the base rate, there is always a lag period, often 3-6 months, before we see the full impact across the market,” Boon said. “I believe that the MPC will worry about deflation, which would be devastating for the economy. This worry, along with concerns over the deflationary impact of a negative budget from the government, may force the MPC to reduce the base rate by 0.5% instead of 0.25%.”
He continued: “At this time, it is unclear how this could impact the mortgage market. As swap rates are increasing, my prediction would be that a 0.25% base rate cut would stabilise mortgage interest rates. However, it seems likely that a 0.5% base rate cut would steadily reduce mortgage rates. This may be the best course of action for the MPC as the additional demand in the economy would hopefully bring the inflation rate back to their 2% target.”
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Will the Monetary Policy Committee cut the base rate in November?
For David Hollingworth (pictured second from right), associate director at broker L&C Mortgages, the latest inflation data should cement a further base rate cut in November, which - he pointed out - was already widely expected. The bigger question, he suggested, is perhaps the impact this could have on forecasting, given that the market has veered around and seen a growing number of lenders having to increase rates recently.
“If the figures lead to a drop in swaps, it could help to alleviate those increases, although there can often be a lag factor in that feeding through,” Hollingworth said. “The upcoming budget is something of an unknown factor, especially in how that could weigh on the more optimistic rate outlook.
“However, although these increases have been a jolt for borrowers we should remember that this isn’t a return to the level of volatility of recent years and mortgage rates look in a far better place. That will no doubt be playing its part in the house price data that continues to show prices in positive growth territory. As the pathway for rates to drop becomes more solid it should help to stimulate consumer confidence and the hope will be for more activity as we move into the new year.”
Richard Campo (pictured right) , head of growth at mortgage and insurance practice Heron Financial, is extremely encouraged to see inflation come down.
“I would be surprised if we don’t see a cut in November and depending on what happens between now and then, we may well see another cut in December which would be a very positive sentiment to end the year on,” Campo commented.
“That said, you have to take this with a huge pinch of salt. Base Rate cuts are expected and priced into current fixed rate mortgage products, so I doubt we’ll see market leading rates go much lower as a result. If anything, the best rates available have crept up fractionally in the last week as money markets have ticked up in recently.”
Campo believes there is just so much uncertainty on a global level at present, which has fuelled the uptick in money markets, that it could be well into next year before there are any meaningful changes to mortgage rates, either up or down.
“I think it is a case of mortgage rates holding broadly steady now until the new year unless anything changes,” he noted. “With many mortgage rates now starting with a three, that has always been a catalyst to stimulate activity in the UK property market. Every major house price indices are now showing gains with more predicted. It is the perennial link between mortgage rates and house prices. As mortgage rates come down, house prices go up.
“A conversation we have a lot with clients at the moment is that if you ‘wait’ for mortgage rates to get lower next year, any gains you make on that side may be dwarfed by the increase in house prices. We are not recommending anyone putting off a purchase when they can move now as they may well end off benefitting from the short term uncertainty for their long term personal gain.”
In an early sign of the rates movement that the market may see over the coming days, buy-to-let lender Landbay has announced reductions of up to 0.15% across its fixed rate product range – declaring it an immediate response to the ‘positive’ news on inflation.
“In recent weeks, the market has seen a lot of movement on rates in reaction to swap rates,” said Rob Stanton, its sales and distribution director. “It’s great to be in a position where we can reduce rates.”
