30-01-2025

Mortgage

Self-employed struggle for mortgage approval
The mortgage market has been reviewed to prevent irresponsible lending practices, with stricter rules imposed to prevent self-certified mortgages and “liar loans.” Lenders now require more proof of income, lifestyle, and spending habits and stress test borrowers’ ability to afford repayments if the base interest rate is three percentage points above its current level. This is particularly strict for freelancers and self-employed individuals, who often face higher interest rates due to their extra risk. The Intermediary Mortgage Lenders Association estimates that around 3.1 m freelancers may have been denied homeownership since the financial crisis due to stricter lending regulations.

Earnings growth eases mortgage burden
According to Nationwide, strong earnings growth has made home purchasing slightly more affordable for first-time buyers. The typical buyer with a 20% deposit now spends 36% of their monthly take-home pay on mortgage payments, down from 2023 but still above the long-run average of 30%. Earnings growth remains at about 5%, and interest rates were lowered to 4.75% last year, easing monthly mortgage repayments. However, the average house price has risen by 3.4% to £292,000, with a cost-to-earnings ratio of 5.0, significantly above the long-term average of 3.9.

Mortgage costs increasing

The Bank of England has warned that many households are facing or will face increases in their mortgage payments over the next few years, adding to the cost-of-living crisis.

Increased affordability through less red tape

Moody’s warns that easing mortgage rules in Britain, Norway, and Finland might boost loan defaults, threatening lenders’ credit ratings. However, enhanced lending practices and robust bank capital reserves could lessen these risks.

Housing

New Build Starts and Completions

There has been a 17% increase in new build starts for the quarter, although completions have fallen. This indicates a potential increase in future housing supply but also highlights ongoing issues with project completion timelines.

Rental Market Trends

Average private rents in Great Britain have fallen for the first time since 2019, suggesting some relief for renters but potentially signalling a cooling demand or increased supply in the rental sector.

Property Price Adjustments

In some regions like Kent, sellers are slashing asking prices by nearly 10%, with homes in the Home Counties selling for £150,000 under the asking price, indicating a possible downturn or adjustment in certain local markets from the post-pandemic boom.

Supply Costs:

There’s an expectation that supply costs for housing will rise between 6-8% in the next quarter, which could further strain the housing market by increasing building costs and potentially affecting new housing developments. 

Economy

ONS data changes

The Office for National Statistics (ONS) has recently announced changes to the methodology for calculating the Consumer Price Index (CPI) in the UK, which are set to be implemented in two phases. The first phase, effective from March 2025, involves shifting from item-specific price imputation to broader ‘consumption segments’ and altering how prices for missing items are imputed. According to ONS, these changes are expected to reduce the reported CPI by approximately 0.11 percentage points annually, excluding distortions from the Covid-19 period. The second phase, starting in March 2026, will incorporate scanner data for grocery items, which aims to enhance the accuracy of price collection by significantly increasing the volume of data used in inflation calculations. Although the impact of this phase is still under analysis, preliminary data suggests mixed effects on different segments, with some food items like cheese showing reduced inflation while milk inflation increases.

Is this manipulation?

The methodology changes described do inherently result in a lower reported inflation rate. However, labelling these changes as manipulation might be an oversimplification. The move towards using consumption segments and scanner data is ostensibly aimed at improving the accuracy and representativeness of the CPI by adapting to changes in consumer behaviour and technology. The reduction in CPI could be seen as a byproduct of these methodological improvements rather than an intent to manipulate data. Nonetheless, any change in methodology that systematically lowers inflation figures can be scrutinized for potential bias, especially given that inflation metrics can influence economic policy, interest rates, and public perception of economic health. Without direct evidence of intent to alter figures for political or economic gain, it’s crucial to evaluate these changes critically but also consider that they might genuinely refine the accuracy of inflation measurement.

The ONS has committed to transparency by providing impact analyses and planning further studies, like the one scheduled for April regarding scanner data, which suggests an ongoing effort to adjust methodology considering new data and consumer patterns rather than deliberate manipulation. However, the public and analysts should continue to monitor these changes and their effects on reported inflation closely.

Business Sentiment

There’s a mixed sentiment among UK businesses. While there’s been a slight ease in the severe downturn of UK factories, overall business confidence seems to be waning, with concerns about economic growth due to increased costs, tax hikes, and reduced business rate relief.

Government Borrowing

The UK saw its highest December borrowing level in four years, putting pressure on Chancellor Rachel Reeves’ economic plans. Despite this, there’s a slight optimism as borrowing costs have shown some signs of stabilisation

To discuss any aspect of the contents of our weekly market update, do give one of the team members a call or contact Fox Davidson via an email enquiry@foxdavidson.co.uk