Sometimes writing about mortgages seems quite trivial compared to other things going on in the world. I wish that the world was a better place for more people.
As we enter the final quarter of the year many of us are likely starting to look forward to 2024 in the hope that it is a better year than 2023.
Focusing on the UK economy, we would like to see a healthier economy with falling inflation, falling interest rates and a better housing market. There is reason to be optimistic, next year is an election year and the current UK gov will want to get the economy in better shape for when we all go to the polls and interest rates/inflation are near to topping out if they haven’t already.
Economic Outlook and Interest Rates
Base rate finally paused for breath last month after 14 months of increases. We will continue to see those increases filter through the economy as people come off their fixed rates and must re-mortgage on to higher rates. We believe, optimistically perhaps, that we have topped out and there is nothing more to be gained from increasing rates further.
Swap rates had started to come down and that has fed through to interest rates falling below 5% for main residence mortgages.
Buy to let rates are reducing to sub 5.5% for BTL’s in personal name. Ltd company BTL mortgages are also below 5%, but there’s a catch, a whopping 5% to 8% fee depending on the deal. This may seem like extortion but if you know a bit about BTL mortgages then you will know that lenders use that 5-year fixed rate in their ‘rent to loan’ calculation and having a lower rate means you can borrow more, needs must.
Commercial investment rates on semi-commercial and commercial property vary depending on the security and the tenant with the best rates sub 7% compared to 9% plus for those tricky to place semi-commercial deals above a pub, next to a hairdresser opposite a petrol station.
Development finance lenders are lending to 90% of costs and 70% of GDV, no change there, and rates are around 9% to 13% depending on various risk factors.
Unlike 2008/9 when lenders pulled out of the market and liquidity dried up, this economic cycle is much different in that there is plenty of liquidity and lenders are lending. Residential mortgages are still possible to 95%, commercial trading businesses can get up to 80% loan to value and a few buy to let lenders will also go to 80% although the maths may not work at that level.
I attended a market update by Southwest surveyors, Vickery Holman, in Bristol last week. In summary:
- Bristol retail units are letting for £42.50 sq ft in the city centre and £23.50 outside. Retail has a 7.8% vacancy rate but grade A holding steady at just over 2%.
- A quarter of offices under development are pre-let or under offer.
- Industrial rents are £8.50 in centre. There were few large transactions this year. The highest sale achieved was for £17 sqft in Bedminster for 950 sqft unit.
- Industrial market remains robust but values have likely topped.
- High build costs continue to affect developers.
- Wapping wharf continues to thrive.
- The market likes versatile spaces with a focus on ESG.
E-surv Acadata for September showed that average house prices continue to fall with an average 2.9% drop in the year to September 2023. Prices falling at fastest rate (over 12 months) for 14 years. Some areas buck the trend and cash buyers are prevalent in higher value areas. U K average house price now £366,348.
The September Hometrack report summarises:
- Annual UK house price inflation moves negative to -0.5%, ranging from 1.6% in Scotland to -1.5% in the South East and Eastern regions
- Demand ticks higher over September as market sentiment improves
- Buyers unwilling to compromise on what they want in face of higher borrowing costs, waiting for price falls and/or lower mortgage rates
- Mortgage rates expected to fall slowly in Q4 2023
- Number of buyers will increase once mortgage rates get below 4.5%
- A buyers’ market remains – the average discount to the asking price to achieve a sale up to 4.2%, the highest since 2019
- Average UK house prices on track to be 2-3% lower over 2023
We are nearly there. The purpose of raising interest rates is to cool the economy, slow down the housing market and the job markets and in all honesty something usually needs to break so that it can be fixed again via lower interest rates and the inevitable quantitative easing. It feels like we are getting there, almost.
The market right now will start to offer opportunities to some. Developers and investors with cash or sensible funding terms may find opportunity in the coming weeks and months.
With residential rates below 5% I would expect to see residential transactions pick up in the coming months and certainly into 2024.
Those who have been holding off refinancing may be tempted to do so with rates falling but many are still waiting for rates to come down further before jumping back into the market.
For investors, timing the property market is not easy. Once rates are at a level where everyone is comfortable again you can be sure that property prices will have already bottomed out. Maybe the wise words of a particularly successful investor are worth remembering ‘buy when others are fearful’.
It has been interesting to see investors finding ways to combat increasing rates, we have seen an increase in landlords focusing on HMO properties which offer increased yields compared to family lets.
What the property and mortgage market needs is innovation and incentives. This can come from lenders themselves and from the government. Lenders can innovate by introducing bespoke lending criteria. One example of innovation we recently discussed with a lender was an ability to lend more for clients taking out long term fixed rates (15 years plus). In the UK mortgage lenders typically offer fixed money at 2 years to 5 years with some lenders offering 10 years fixed rates. In the US it is quite normal to offer 20-to-30-year fixed rate mortgages. But why is this innovative?
Well, it is all to do with how lenders work out affordability. Lenders still stress test affordability based on higher interest rates ‘a worst-case scenario’. Some lenders offer improved affordability for those taking a 5 years (plus) fixed rate. The argument is that a longer-term (15 years plus) fixed rate would offer lenders even more certainty for a borrower’s affordability and therefore applicants opting for a longer term fixed mortgage could be offered increased income multiples. In hindsight many of us would have fixed for 20 years at sub 2%!
Innovation can also come to the property and mortgage market via the UK government. Previously we have had ‘Help to Buy’ and stamp duty breaks/reforms. It is our belief that around Q2 of next year we will see some incentives introduced to help boost the sale of homes and to get FTB’s onto the property ladder. Like it or not, housing is everything in the UK.
Fox Davidson continues to offer property finance advice to all clients from first time buyers to portfolio landlords and property developers. To discuss property finance with one of our team or if you just wish to chat about the market or network to explore opportunities, please do get in touch.