Matthew Henderson
Associate Director, Residential Research
The Chancellor’s ‘mini-budget’ kicked off a week of economic turbulence, impacting mortgage markets directly. Matt Henderson, Research Associate Director, gives insight into what the current uncertainty means for the housing market.
Inflation, Interest rates & Budgeting; the impact on the housing market
Uncertainty is often a frustrating market indicator for a data analyst and researcher, impossible to record accurately or plot on a graph, but it is a very real indicator that can have seismic effects on the market.
Mr Kwarteng’s ‘mini-budget’ was flawed, but it didn’t drive the Pound to new lows and cause the Bank of England to step in to save government bonds on its own. The Government took the unusual move of not allowing the Office for Budget Responsibility (OBR), or any alternative regulatory body, to forecast their economic plans pre-announcement. This simple act fuelled uncertainty in the financial markets before the ‘mini-budget’ had even been made public.
What does this mean for mortgage and housing markets?
With mortgage rates rising and hundreds of fixed rate products being removed from the shelves this uncertainty has fed into the housing market. “Most banks still have strong balance sheets and are looking to lend, but unable to price fixed rate products they are mainly offering variable rates” says Mike Boles, a director at SPF mortgage advisory. Any stamp duty savings for first-time buyers
[1]
, one of the more reasonable announcements from the mini-budget, have been drowned out by hikes in mortgage rates. Nationwide’s latest 2-year-fixed mortgage is at a rate of 5.6%; a 120 base points rise that equates to an 11% fall in the amount that can be borrowed, assuming that repayments as a proportion of income stay the same.
In the short term this level of ambiguity around repayment costs will stall leveraged buyers, reducing transaction numbers and putting downward pressure on house prices. But challenges are always balanced by opportunities; those purchasing in cash and able to move quickly will be at the front of the queue to secure these.
Until the Prime Minister and Chancellor announce how they are planning to fund their fiscal policies the markets will struggle to settle. A recent meeting with the OBR (on the 30th September) has quelled some uncertainty in financial markets and the reintroduction of the45p tax rate has done a little more. However, the tax cuts only account for£2bn of the initial £45bn deficit and the Treasury has confirmed that a full forecast will not be produced before for Mr Kwarteng’s ‘medium-term fiscal plan’ in November. Although, as with everything at the moment, this may change soon.
What other market conditions are having an impact?
There are still a number of pillars of certainty in the housing market, one of which is its extremely secure supply demand dynamic. Even with the dampening of demand caused by the current economic climate supply is unlikely to overwhelm demand. This imbalance has led to recent house price growth providing much of the market a buffer to absorb any immediate corrections in house prices.
Furthermore this ‘dampened demand’ is not a fundamental decrease; the recent increase in the cost of borrowing is unlikely to have reduced the number of people who want to buy a home, it has just reduced the number for which it is currently financially viable. This demand will return to the market when rates settle and these new costs have been priced in.
The UK currently has an extremely strong labour market at the moment. Unemployment is currently at 3.6%, relative to an average unemployment level of 6% pre-COVID[2].
The level of employment in the economy will be weakened due to the trajectory of economy which has been exacerbated in the last few day. However, unemployment is expected to stay relatively low for a recessionary climate which will help the economy from slowing too sharply, as it likely would otherwise.
How disruptive will this be?
Many buyers who have secured a fixed mortgage rate in the last few months will be keen to move forward on their purchases knowing they will not able to attain such a rate again in the short to medium term.
In the medium term the disruption to the housing market will be supported by the strength of the jobs market, strong pay growth means that a modest fall in house prices will be enough to return the house price-to-earnings ratio to a more sustainable level. Once affordability constraints relax those most affected by the rise in rates, first-time buyers and buy-to-let landlords, will be able to re-enter the market more quickly boosting further recovery.
The Treasury has implied that the ‘mini-budget’ is only part of the picture with a series of ‘supply-side’ measures still to be put in place. We shall have to wait and see how these impact the housing market and the wider economy; it is unlikely that the full picture will be revealed before the Chancellor’s full briefing on the 23rd November, please update your diaries.
[1]
From the 23rd September 2022 first-time buyers no longer have to pay any stamp duty on a property worth up to £425,000, up from £300,000 before in England & Northern Ireland. This now applies to any property worth up to £625,000, up from £500,000.
[2] Bank of England, Monetary Policy Report - August 2022, Table 1.E; taken between 2010and 2019 inclusively
At a time of uncertainty, it’s crucial to seek advice and be transparent with those advising you on your sale or purchase. While people move maybe a handful of times in their life, those of us advising on those moves are used to navigating complex sales and markets, and can share advice. Each person’s circumstance will be different, and will require bespoke guidance. The above text should not be considered financial advice.