Dec 17 – Neither a Marathon nor a Sprint
The entire housing agenda is now at the heart of government policy with Theresa May picking up the baton on getting Britain Building as the domestic diversion to the Brexit negotiations. She has now taken over after David Cameron ran a decent first bend, with May now stretching her legs down the back straight being cheered on by Sajid Javid and Philip Hammond. It is they who have to keep her on track if she is to deliver her key domestic pledge. Whether the UK can get the baton home is dependent on a number of key factors. The aspiration of delivering 300,000 new homes a year is a real stretch target, but the Budget has provided proper building blocks with a key change being the promise of more funding to deliver new apprenticeships to train the tradesmen to construct.
The promised attack on builders undeveloped land banks, pressure to complete sites more quickly, cleaning of polluted land to be handed back to local authorities, taxation of empty properties and the continuing assault on private landlords whilst freeing up first time buyers from stamp duty costs is a huge change agenda. Not since the post Second World War rebuilding programme have we seen such a concerted drive.
And funding will be available. The recent increase in base rate is gradually feeding through to the back books of lenders where their borrowers are not on a fixed rate. The increases will start in December or January depending on the lenders systems and their need to give adequate notice. Market rates for new borrowers have shifted up a little, but the conundrum all lenders are facing is that this is a very competitive market for both re-mortgage and new business. They are all acutely aware that thy need to have a good pipeline going into 2018 as applications received now are unlikely to complete until the new year. They all need a good start to 2018 as it is never easy playing catch up to target in any lender. So whilst we may have lost some of the amazing deals, do not expect the 25bps increase to be fully passed on in new business. Many savers are no seeing this either.
Lenders still have access to cheap funding through the Term Funding Scheme. The Bank of England has just topped this up from £115bn to £140bn as a further clear indication of support for the residential mortgage market. The Bank was concerned that there was not enough capacity before this funding window closes at the end of February 2108. This addition of liquidity to the market is provided against mortgage books and in is addition to the Quantitative Easing and other Asset Purchase facilities being used by the Bank of England to keep the market vibrant. This allows lenders to acquire further funds to lend which only costs them Base Rate, which is significantly cheaper than Retail or Wholesale funding.
This is against the backdrop where the Governor of the Bank of England in his Quarterly Inflation Report and his subsequent interviews set out clearly the risks surrounding Brexit. The Banks’ current modelling is based there being some form of agreed exit with some form of trade agreement, capacity for our key London financial services to trade pan-Europe and financial penalties consistent with our known financial commitments. Any deviation from this has the potential to increase the down-side risks to the economy.
Mark Carney was clear in interviews that the Bank saw the uncertainty created by the fraught nature of any negotiation like this as reducing market confidence and adversely impacting on commercial decisions to invest. The Banks current assumptions are that these will dissipate over time and their projections are based on delayed not cancelled investment decisions. This makes an agreed deal more essential than many Leavers are prepared to accept. However the downside risk of not getting a deal will mean that the Bank would have to look again at its projections on GDP, inflation and interest rates in order to protect the economy. The recent falls in sterling value has not delivered the gains in exports, output or productivity hoped for.
So this looks like a longer distance event than a “dash for growth”, with consistent policy being essential to see plans through and deliver results.