Two years after the historic decision to leave the EU, the UK’s housing sector and mortgage market has so far managed to avoid most of the dire consequences predicted by Remainers. Nevertheless, the sector is experiencing a slowdown, perhaps more than is usual at this time of year.
Chart 1, below, shows the trends in house sales since December 2016. A small uplift in May does nothing to contradict those who report that the mood of the market is decidedly quiet.
Subsequent to that, Rightmove recorded a virtual price standstill in July, as the number of properties for sale rose 8.6 per cent compared with the same period in 2017. It also said the number of sellers reducing their asking prices was at the highest level at this time of year since 2011.
Meanwhile, the Royal Institution of Chartered Surveyors said new sales were down for the 16th month in a row. It added that its data suggested the softer trend in sales volumes would not improve over the coming months. Economic and political uncertainty are seen as part of the problem, and although the worst-case scenario has not yet materialised, Brexit is clearly a rather important contextual factor for the sector.
Monetary tightening
Monetary policy may also be playing a role. In its minutes of 21 June, the Bank of England’s (BoE) Monetary Policy Committee (MPC) suggested some of the weaknesses it observed in household spending and sentiment in the first quarter have reversed notably. Employment indicators remain strong, in its view. It added growth was likely to fall in line with its previous projections, while inflation was likely to exceed expectations. Should the economic backdrop develop in line with its May inflation report projections, “an ongoing tightening of monetary policy would be appropriate”.
This has led to some ‘will they, won’t they?’ speculation around the raising of the base rate, or perhaps more accurately, ‘will it be sooner rather than later?’
Richard Stone, chief executive of the Share Centre, says the role of MPC member Andrew Haldane is important. The fact that Mr Haldane voted for a rate increase against the majority for the first time in his four years of membership is evidence a hike is imminent, he believes. The MPC vote shifted from 7-2 against to 6-3 against in light of Mr Haldane’s move. “We continue to expect a rate rise in August,” Mr Stone says.
Nancy Curtin, chief investment officer at Close Brothers Asset Management, argues the BoE is unlikely to increase rates until the economy appears more resilient. She says that both businesses and investors face “uncomfortable uncertainty” over the UK’s future relationship with the EU, and that this will have an inevitable impact on the economy. “Until the picture becomes clearer – on Brexit and the economy – the BoE is unlikely to be anything but cautious on the speed that it raises rates,” she concludes.
While caution is the watchword, many believe the central bank will hike rates at least once in the second half of this year. Fortunately, the mortgage industry is no longer worried about the potential impact of rate rises on UK households. Bob Pannell at Intermediary Mortgage Lenders Association says stringent mortgage regulation and affordability requirements have helped to lessen the impact, and that most mortgaged households are likely to cope.
However, unsecured borrowing has grown in recent years and 60 per cent of mortgaged households are said to have some unsecured debt, mostly based on variable-rate deals. Mr Pannell admits that, given the varying financial circumstances of UK households, base rate rises may cause “pockets of greater payment stress to show”.
Nonetheless, the majority of mortgage borrowers are likely to be on fixed rates, which provide some breathing space before any rate rise affects finances. On top of this, recent borrowing has been largely based around repayment mortgage deals: rate rises will have less of an impact upon these in comparison to interest-only mortgages.
The MPC’s cautious stance is a further reason for optimism – it is keeping a close eye on the economy and signs of stress would likely prompt a further reduction in the pace of tightening.
