The UK mortgage market at the end of 2015 and beginning of 2016 has been marked by new highs and lows. The Council of Mortgage Lenders (CML) described the past few months of lending activity as being supported by four strong fundamentals: low inflation, strong wage growth, an improving labour market and competitive mortgage deals.
Gross mortgage lending hit £19.9bn in November 2015, 9 per cent down on the previous month, but 23 per cent up on the preceding 12 months. The CML estimates that total lending for 2015 was £214bn, up from the £209bn it forecast in the middle of 2015. The Table shows the figures for past years and forecasts for 2016 and 2017.
Also, the past few months have been characterised by increasingly lower rates as lenders competed for business. A well-known data provider reports that the average two-year fixed rate has fallen from 3.21 per cent as at the end of December 2015 to 2.56 per cent at the end of December 2016. The lowest two-year fixed rate of 2015 came from Post Office Money, which offered 1.09 per cent in August 2015.
The CML reports that borrowing is up across the board among movers, remortgagers and first time buyers. However, it predicts a slowdown in UK housing activity over the next two years with three main factors restricting activity: the already elevated levels of house prices relative to earnings, regulation, and uncertainty around buy to let as new, harsher conditions come in for landlords.
The CML suggests that many would-be movers are deciding to stay put, given the high transaction costs and a limited choice of properties to buy, leading to subdued housing activity. This in turn reduces supply, pushing prices upwards and leading to continuing affordability pressures. Not surprisingly experts are predicting that house prices will continue to rise in 2016.
While catching the headlines, government initiatives designed to stimulate activity in the market – such as help to buy and house-building proposals – are likely to take some time to deliver the goods.
Pointing to the inevitable time lag between their announcement and their actual implementation, as well as uncertainty about the extent to which some measures simply displace rather than add to overall activity, the CML suggests that they are unlikely to begin to make any impact until the second half of 2016.
However, the historic decision of the Federal Reserve (Fed), the US’s central bank, to raise rates points the way for the Bank of England (BoE). The move, made in mid-December 2015, increases the rate for the first time in nine years and draws a line under the period of low rates designed to help the US and global economy to heal.
The Fed chairman, Janet Yellen, said the decision marked the end of “an extraordinary seven-year period” during which the rate was held at near zero in a bid to support economic recovery from “the worst financial crisis and recession since the Great Depression”.
The rate was last cut in 2008 to between 0 per cent and 0.25 per cent, but has now been raised to a range of 0.25 per cent to 0.5 per cent. Ms Yellen referred to the rate rise as a move to begin to “normalise” interest rates against a backdrop of improving labour figures, rising incomes and a strengthening economy.
But she acknowledged that the US economy is not in perfect health and that the Fed is also keeping an eye on international economic conditions. She has made it clear that the approach is cautious and that future rises will be gradual.
False alarms
The governor of the BoE has already sought to downplay the Fed’s move, insisting that the UK will not necessarily follow suit. While the Bank’s forward guidance policy is designed to give markets a heads up on decisions to come, there have been a few false alarms, leading to the accusation that its behaviour was like that of “an unreliable boyfriend”.
Unfortunately, this is a reputation that it has yet to shake off. So despite the denials, many suggest that the Fed’s decision means a rise in the UK Bank base rate could come sooner rather than later. Consequently, much of the activity in the market stems from borrowers locking into attractive fixed rates in anticipation of a rise.
While economic conditions in the UK appear to be strengthening, the BoE – like the Fed – also has an eye on the global economic arena. Falling oil prices, economic slowdown in China and recessions in several countries, including the once flourishing Brazilian economy, mean that the global economic outlook is not so rosy.
Some are predicting that the Bank base rate will rise in mid-2016, while others suggest it won’t happen until the beginning of 2017. Uncertainty about exactly when remains, but one thing is certain: it will happen.
