By Before noon’s announcement from the Bank of England on interest rates, I was all ready to write that we should not regard a rise in official interest rates from 5.25% to 5.5% – as generally expected ahead of the decision – as bad news.
Such a rise was priced into mortgage markets, and mortgage rates had been edging down.
As everybody now knows, there was no such rise, the Bank opting to leave its rate unchanged at 5.25%, on a 5-4 vote, thus breaking a sequence which had seen 14 rate rises in a row.
This was not anticipated by the markets, even in the minutes ticking up to the announcement, so this paved the way for mortgage rates to come down even further.
It was good news.
This decision completed one of the strangest 12-month periods for official interest rates, mortgage rates and the housing market.
It is now almost exactly 12 months since Liz Truss, the very short-term prime minister, and her even shorter-term chancellor Kwasi Kwarteng, almost blew a hole in the housing market with the oddest and most irresponsible “mini” budget in modern history.
She has been defending it, though most people will remember it differently.
Two things survived from it.
The previously planned increase in National Insurance contributions for employers and employees, intended to have been renamed as the health and social care levy by now, was scrapped and has not been revived.
For the housing market there was the minor positive of a reduction in stamp duty, by raising the threshold at which it is paid (except for second homebuyers and most landlords) to £250,000, accompanied by an increase in the nil-rate band for first-time buyers from £300,000 to £425,000.
This was temporary, but quite long lasting.
The main threshold will revert to £125,000 and the first-time buyer band to £300,000 after March 31 2025, by which time we may have had a change of government.
This positive was, of course, swept away by the huge negative of surge in bond yields, a slump in sterling to a record low against the dollar, a crisis for pension funds and massive dislocation in the mortgage market, with hundreds of products withdrawn overnight, as markets feared that Bank Rate would have to rise as high as 7%.
This was the first realisation for most people that something dramatic had changed.
Years of stretched affordability when house prices were measured against earnings were compensated for by ultra-low mortgage rates.
When those mortgage rates started to rise dramatically, things changed.
Affordability was suddenly under enormous pressure.
Everybody reading this will know that housing activity and prices turned down quickly in the aftermath of that mini budget and, by and large, things have stayed down.
Prices are down by 4% to 5% on average.
Even the official house price index is down, though by a smaller amount.
Monthly mortgage approvals are running at about two-thirds of their pre-September 2022 level.
The latest RICS (Royal Institution of Chartered Surveyors) residential survey was very gloomy.
The housebuilders are cutting back.
It could, however, have been much worse and the situation now unfolding is rather better than it might have been.
There were plenty of predictions around last year of massive house price falls, perhaps 20 or 30 per cent, and some of those were made before the Truss-Kwarteng calamity.
Never say never, but that looks highly unlikely.
What we have learned, instead, is that the housing market is more resilient than people feared.
Prices have slipped rather than collapsed, and some of that has had the effect of introducing a bit of reality into the market.
Though it is a story that has often been written, there has not been a mass exodus of landlords and, looking at the continued shortage of rental properties – now even making the headlines on BBC News – some will see the current situation as a buying opportunity.
The adjustment to higher interest rates is not yet over.
Most homebuyers on fixes of five years or more have yet to feel the effects, and the pain.
But that should not be overstated.
After the pandemic boom in prices, we have seen a necessary cooling off.
Now, however, though the Bank has not declared that rates have hit a peak of 5.25%, there is a very good chance that it is.
Rates are thus hitting what the Bank’s chief economist Huw Pill describes as “Table Mountain” – a period in which they remain unchanged for some time – at a lower level than was once feared.
A 5.25% peak, or even on of 5.5%, is a lot better than 6% or 7%.
As for interest rates staying at this level for a very long time, this is something that central bankers have to say, or otherwise they would undermine the impact of their own hikes.
Things can change, and they will.
We have seen one such change over the past 12 months and the housing market, while clearly affected, has shown considerable resilience.
We can hope that the next 12 months, at the very least, should be much more stable.
Comments