This year has been full of changes and it doesn’t look to be quietening down anytime soon. We look at changes to the economy, interest rates and look forward to 2023.
Inflation & Interest Rates At Highest Levels In Years
As inflation runs out of control the Bank of England have been forced to raise interest rates five times this year. Base rate has increased 1,650% from 0.1% in December 2021 to its current rate of 1.75%. The bank of England will meet today (22/9/22) to decide on another rate rise, widely expected to be 0.5% bringing us up to 2.25%. The last time base rate was at 2.25% was 2008.
Yesterday we saw the Federal reserve raise interest rates in America by 0.75%. Chairman Jerome Powell painted a hawkish picture as he committed to raising interest rates “until the job is done”. He also painted a bleak outlook for property prices in the US “For the longer term what we need is supply and demand to get better aligned so housing prices go up at a reasonable level, at a reasonable pace and people can afford houses again” he said. “We probably, in the housing market, have to go through a correction to get back to that place”.
Like the United States, the Bank of England inflation target is 2%. It is currently at a 40-year high and was at 9.8% in August, down from 10.1% in July. We clearly have a way to go until rates can start to settle and forward models are predicting base rate peaking in Q3 or Q4 of 2023 at 3% to 4% (see links at bottom of article).
The increase in base rate has of course meant that mortgage rates have increased. A typical 2-year fixed rate at sub 60% loan to value for homeowners is now 3.75% and a 5-year rate is 3.60% (data taken from Halifax). At the start of the year, you could fix for under 2%.
The rising mortgage costs will be painful for anyone coming off a fixed rate on their current mortgage. For homebuyers applying for a mortgage, affordability checks will be carried out in the normal way and either the loan is affordable, or it is not. We have seen a relaxation of the affordability rules and lenders such as Nationwide will lend up to 5.5 x annual income for the right clients. The increase in rates will influence the property market as the increased mortgage costs will price some out of the market.
One of the areas of property finance that has had it ‘easy’ from a lending perspective over the last 10 years is buy-to-let mortgages. Typically, mortgage lenders lend an amount based on the rental income a property will achieve. The calculation is typically like this: Annual rent / 125% (for basic rate taxpayers and Ltd companies)/ 5% or the 5-year fixed rate if lower.
If you had taken a 5-year fixed rate earlier this year at around 3.2% you could have borrowed £360,000 on a property with a monthly rent of £1,200. With interest rates now creeping up past 5%, landlords are finding the amount they can borrow is greatly reduced. Using 5% in the above calculation the max loan would now be £230,400, which is 36% less lending.
The reason I highlight this point is that the rising interest rates are greatly affecting affordability for homeowners, but also substantially affecting the borrowing power of landlords.
All of this is good news for any first-time buyers who are hoping the housing market cools off, but with mortgage repayments rising, the net effect may be that many still cannot afford to get onto the property ladder.
On Friday, new PM Liz Truss will deliver a mini budget. Chancellor Kwasi Kwarteng will make his first fiscal statement since taking office. We are expecting tax cuts and possible changes to stamp duty. Changes will be designed to boost the economy and help with the rising cost of living.
It is anticipated that a planned rise on National insurance will be reversed, corporation tax reduced, and we have already seen an energy price cap to combat rising fuel bills for households and businesses.
It is anticipated that there will be a cut to stamp duty too. We hope that stamp duty will cut altogether for first time buyers and for anyone downsizing as these are the people that will benefit most from a reduction in stamp duty. These actions will help to boost the housing market during the 12 months.
Ever since the money printers were turned on in 2009, the economy has been inflated with money. The covid crisis furthered money printing, and now we all have to pay for it. Add in the war in Ukraine, the effects on supply chains and we find the economy in a difficult position.
The next 12 months will be difficult for some, and it is likely that many of us will need to be more considered in our spending. The UK property market is always under supplied, and after speaking to agents, developers and home buyers, it is clear that the housing market has some way to go before it becomes a buyers’ market. The expected tax cuts and stamp duty changes are likely to boost the housing market.
Come what may, we will continue to advise clients on the best financial solution to allow them to build, invest and reside in property.
Links to referenced data: