May 18 – The only way is up

The UK economy remains in relatively good shape with the Office for Budget Responsibility revising up its growth forecasts for the next three years in March’s Spring Statement. Consumer price inflation also fell back to 2.5 % in March, having been stuck at around 3 % for several months. While still above the Bank of England’s 2% target, this is a significant move and could ease some of the pressure on the Monetary Policy Committee to raise rates quickly to control inflation.

Further evidence that should support relatively dovish monetary policy this year came in the form of employment figures which showed a continued drop in the number of people out of work, with the three-month average unemployment rate falling to 4.2 % in February. Wage inflation remains somewhat subdued however, with some workers expressing frustration at having to accept part-time work, or a number of part-time roles, in place of a full-time job.  This may be contributing to the pressure on wage growth, which year-on-year rose by only 2.8 % in the year to February. This means that we are back in positive real income growth territory, albeit marginally.

Consumer confidence – a vital influence on the health of the housing market – is dropping and is down on the start of 2016. According to the Bank of England, falling public confidence relates largely to the general economic situation, with fears over the fallout of Brexit likely to be contributing to a pervading feeling of uncertainty. While household spending has remained relatively stable there are signs that uncertainty is weighing on homeowners’ desire to move.

This shows in transaction figures as well as lending. Gross lending continues to be variable from month to month. The most recent figures from the Bank of England show that mortgage approvals fell below their previous six-month average for both house purchase and remortgaging in February, to 63,910 and 46,622 respectively.

There remains an education piece for lenders and brokers to illustrate that borrowers who fall outside of the vanilla criteria are able to secure a mortgage under the rules introduced as part of the Mortgage Market Review. Indeed, several products have launched in the past few months that should go some way to aiding that discussion with borrowers who have felt restricted in the aftermath of MMR. These relate specifically to part and part capital repayment and interest-only mortgages as well as home loans designed for those with impaired credit who wish to rehabilitate their finances through the responsible management of a mortgage.

Interest rate expectations

Taken together, the economic data suggest good reason for the Bank of England to be wary of raising the base rate too far too fast. Should nothing occur to dent confidence and investment further, then only a 0.5% rise in the base rate by the end of 2019 would seem most likely and achievable. There is, however, still the very real possibility that Brexit throws this off course completely.

But as it stands, there will 0.25% base rate rises in 2018 with a 60% probability of it occurring in May, 75% certainty by August and 90% probability by November 2018. There would be a minority who would feel rising rates acutely, given their disposable incomes are already virtually non-existent. However, it is likely that these households are already flagged as potentially vulnerable by lenders, which are therefore prepared to use a range of forbearance measures to help manage any payment shocks initiated by a rise in base rate. Many are insulated for some time by having a fixed rate mortgage.

A potential exacerbating factor in the timing of the first potential rate rise – in May – is the withdrawal of Support for Mortgage Interest in April. This benefit ceased from the start of the new tax year, and has been replaced by a loan with interest accruing and the final outstanding amount repayable on the sale of the property. Alarmingly however, less than a quarter of SMI claimants have agreed to convert the benefit to a loan, meaning they will already be suffering a payment shock on their mortgages.