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Economics 101: The One Thing That’s Certain? Uncertainty.

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By Nitesh Patel, Strategic Economist at Accord Mortgages 

Well, almost one quarter into 2023, it seems any bets made cautiously at the end of 2022 are well and truly off.

We entered this year with an element of ongoing uncertainty – and markets seemed to be regaining some stability after the effects of the disastrous Mini Budget last September.

New political leadership signalled a ‘steady eddie’ approach to fiscal policy and better signposting of future developments ensured that the market swap rates which help set mortgage pricing had started to tick down from their worrying upward trajectory, which had everyone fearing mortgage rates could even reach well over 6.5%.

It looked like such stability might give us a fighting chance of a better year than many pundits were predicting.

However, two-and-a-bit months in, the rollercoaster is off again, with swap rates, and with them fixed rates, ticking up by 0.70% more recently, before heading sharply down again after the collapse of Silicon Valley Bank (SVB) in the US knocked market confidence, and with it expectations that raising rates could be necessary to curb inflation.

The collapse and subsequent rescue of Credit Suisse (CS) a few days later compounded this effect.

Before that happened, factors like better than predicted economic performance across the pond, including lower than expected unemployment and higher than anticipated consumer spending, looked set to send this key cost benchmark, and with it rates, higher. And, as we know, what starts in America often makes its way here in short order.

What’s on the cards?

If this ping-ponging in market rates served to remind us of anything, it was the fact no-one can really predict what’s to come with any certainty at the moment. That, of course, doesn’t help intermediaries who are trying to guide their clients on whether to stick or twist in light of interest rates and house price trends, when it comes to their plans for buying, moving or remortgaging. 

Bank of England governor Andrew Bailey has announced he will take a ‘sit and wait’ approach to future base rate increases, now that a number of increases have increased this central benchmark to 4%. 

Markets have been expecting the Bank Rate to peak at 4.75% later in 2023, but following the SVB/CS crisis, that has eased to 4% to 4.25%. However, we are unlikely to ever see a return to the exceptionally low rates we’ve enjoyed for almost 20 years now, and indeed borrowers seem to be adjusting their expectations towards more historic averages of 5%. 

In terms of how these fluctuations could play out for the housing and mortgage markets, the Intermediary Mortgage Lenders Association (IMLA) and the Association of Mortgage Intermediaries (AMI) predicted in a recent Growth Series podcast that we could see a potential 20% decrease in house purchase activity during 2023 – hopefully offset to some extent at least by record numbers of product transfers. 

They think the particular squeeze faced by landlords due to factors such as affordability and increasingly stringent taxation rules could result in a 25% decrease in buy-to-let purchasing activity during the year. Averaging the two bodies’ predictions, gross mortgage lending could total £270 billion this year, down £41 billion on 2022 thanks to the expected fall in transactions.

So, what does all this mean for the advice brokers should be giving their clients in the melee? Overall, we’d recommend guiding them based on what is best for their circumstances given the known situation at a point in time. Any suggestion that they should hold tight in the hope of a fall in either rates or property valuations would be risky given the uncertainty that continues to surround what might actually come to pass, and the fact that, in reality, things could go either way.

What’s driving the direction of interest rates?

The core factor, of course, is inflation, with the Bank of England using rates as, effectively, a stopcock to control cost increases. This key market benchmark has reduced from its 11.1% peak last October, to 10.4% and the Chancellor has said it is expected to fall to 2.9% (based on the OBR forecast), a whisker away from its 2% target, by the end of 2023. 

Factors like falling real earnings growth are expected to depress consumer spending, gas prices have been falling and base effects - i.e. comparing high prices today with high prices a year ago - which will show a lesser increment as time goes on, should all help bring inflation down.

Although the bank base rate doesn’t directly control the mortgage rates offered to consumers, sentiment around this central interest rate does drive swap rates and therefore determine where mortgage costs level out. So, we hope the Government will continue to allay the economic concerns which led to large rate spikes in the first place, resulting in a further downward trend in swaps.

What does the Spring Budget mean for all this?

The best we could have hoped for from the Budget this time around was therefore very little, other than that reassurance. The financial industry as a whole now needs a steady ship with a competent crew, and no more sudden course-changing. Instead, the important thing is steady, clearly signalled business-as-usual.

Which is pretty much what we got on 15 March – with a few changes added to the mix to boost the productivity the UK now needs to return to the kind of growth other ‘rich’ economies like the US, Germany and France have enjoyed again since the pandemic. This included steps to help entice people back to work and so make them more productive, the extension of free childcare to working parents of children aged between nine months and two years, the scrapping of the pension lifetime allowance and an increase in the annual tax-free contributions limit from £40,000 to £60,000.

We welcome such measures to boost business growth because anything that boosts economic confidence will help encourage more people to feel happy making their biggest purchase of all - new homes. Any suggestion of more ‘money printing’, other than targeted help for the worst-off, would only have created more economic problems in years to come and risked increasing inflation further.

There are too many bigger economic issues to sort out to expect the Chancellor to do anything dramatic for the housing market at the moment – although, in due course, more support for first-time buyers would be a good idea, because they are the engine that keeps things moving. When the Help to Buy scheme ends on 31 March, it will be the first time in 20 years that there has been no government-backed support for those starting out.

The fall in wholesale gas prices, and government reassurances that these are passed on, are examples of the green shoots of recovery we’re starting to see, although food costs, which affect households’ available cash more than anything, are still up 18.2 per cent. 

We believe house prices may fall further this year, by up to 8%, although, in reality, this would only be a minor readjustment in the context of a 25% growth in values over the past three years.
Affordability pressures caused by the spiralling cost of living are arguably the biggest blocker preventing borrowers from remortgaging, especially in the context of higher mortgage rates, and this is why the residential market remains 30 per cent down compared to the same period of 2022.

What can you do?

The reality is that different kinds of economic and market challenges have arisen and subsided many times over recent decades, so the first important step is to have confidence that things will come right again this time too.

In terms of your own business, we’d urge you to remain positive, and look for the fresh opportunities that, inevitably, always emerge from any market crisis. Perhaps this is actually a good time to widen your portfolio of advice services, to help people take a fresh look at all aspects of their finances, not just their mortgage.

There is no doubt that intermediaries play a more vital role in supporting consumers than ever before, because of the current challenges – they need an independent party that can take into account all their needs and circumstances, and recommend a product which, as a whole, beyond the headline rate, suits what they want to achieve.

However, arguably the most vital thing you can do for your clients, today, is advise them based on what market knowledge is available in the here and now, as making any assumptions or predictions in such a rapidly changing environment would be fraught with risk.

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