It also believes that a slowdown in house price growth is on the cards, as the market finally adjusts to the low interest rate environment.
In its Market Commentary, the CML says: “At the current average mortgage rate of 5.11%, initial mortgage payments take up 18% of income. If mortgage rates reverted to the 15% seen in 1990, 39% of income would be used for mortgage payments, clearly a significant proportion. In fact during the peak of the boom around 25% of income was used for mortgage payments. To return to this level mortgage rates would need to increase to around 9%.
“Most commentators expect interest rates, and consequently mortgage rates, to remain well below this level; Treasury report the consensus forecast for interest rates to end this year still at 4% and to increase by around 0.7% by the end of next year. It would appear that we have seen much of the adjustment towards the low interest rate environment. Consequently the “windfall effect” to the housing market from this transition period is likely to be coming to an end. If we have seen most of the adjustment to this, the housing market will face a period of more modest growth going forward.”
From consumers’ point of view, a 1% decrease in mortgage rates reduces the monthly payment on a £100,000 interest and capital repayment mortgage by around £65. According to the CML, this reduction not only stimulates the housing market directly but can also fuel additional consumption and therefore boost overall growth. Despite average house price growth of c12% and earnings growth of only 4.5% per annum over the last five years, falling interest rates have meant that the percentage of income used for mortgage payments has remained almost constant. This has enabled house prices to grow strongly without affordability constraints kicking in.
