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Your November 2024 mortgage & regulatory update

AMI's monthly mortgage & regulatory update, including FCA consultations, surveys and policy statements, and a new green mortgage advice webinar...

What can our market expect under a new government?

As AMI Chief Executive Robert Sinclair prepares to step down, he writes for Moneyfacts on what the market can expect under a new governement...

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AMI’s new Protection Viewpoint Report: Making Protection Personal

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What can our market expect under a new government?

 As he prepares to step down as AMI Chief Executive, Robert Sinclair discusses the future for housing and mortgages under a new government, in his latest article for Moneyfacts Magazine.

Writing any article at this point in the political and economic cycle is fraught with difficulty. Written before the Budget, published after. Even so, the short to medium term implications of the first Labour budget in 14 years weighs heavily on thinking. The size of the issues implied in the run up appear to require major surgery that is likely to put pressure on international confidence, limit sterling strength and therefore imply higher market interest rates. 

Avoiding the Truss effect with the changes in the borrowing rules will require a deft touch, and not all the implications will be on day one. Core will be ensuring that markets see the borrowing as invested wisely. The total cost of servicing and “re-cycling” the projected UK national debt (borrowing) weighs heavily on the current tax take, and is only likely to worsen in the medium term. Economic growth at a rate faster than the other G7 countries will be essential to maintain stability and grasp a prize worthy of the risks.

Contradictions in financial markets remain the order of the day. As we saw from the last base rate cut, it came with another slice of quantitative tightening that drove the gilt yield curve away from the implied SWAP curve. Market trajectories are not one dimensional, and we will see more tightening alongside cuts in base rate. Although the yield curve disparity has now corrected to a degree, there is still likely to be volatility in financial markets as the result of the US Presidential election, which will also impact adversely the global cost of money. Competition for international liquidity is only going to intensify.

How the Bank of England will see the Office of Budget Responsibility assessment of Rachel Reeves’ first foray into fiscal and departmental control will be a key test for this new administration, with big plans for an entity who tell us they have inherited hosts of unfunded liabilities. Whilst some are more simple departmental costs, many of these have emotional public tones – the Post Office scandal compensation and contaminated blood recompense amongst others. Also, the levels of potential losses from Boris’s bounce-back loans, which were underwritten by Treasury, is likely to become a huge battle ground between the Banks and this new government. That bill could yet be eye-watering. Irrespective of where it lands this, alongside the liabilities that will fall off the back of the motor finance commission investigations by the FCA, will have huge implications for most of our largest lenders.

This complex financial backdrop sets the tone for the developing housing strategy. The clear messaging of removing planning barriers and NIMBY objections is the start of the new journey. The development of brown and grey land, as well as forays into the green belt, must be expected. A clear emphasis on bringing back local authorities’ ability to build or invest into new joint ventures should be a core development. This, together with more social housing and shared ownership, are already signalled as key initiatives for the next decade, with such infrastructural projects very much at the heart of the first year of this new government. 

Much of the investment will come through the Metro Mayors. The successes of the Burnham joint ventures with the private sector in Manchester will undoubtedly be a blueprint to be followed in other areas. Whilst this will kick-start volume, it will require a vast move away from the current market, driven by the volume speculative house builders who currently dominate the residential construction sector. However, to meet the targets, bringing back these older concepts must be incremental, not as a substitution for standard residential construction.

The implications for materials supply chains are considerable, as are questions over whether we have the required skills and talents in the working population. A huge expansion in apprenticeships linked to the construction sector has to occur, potentially at the expense of some of the more marginal universities and courses.

Against this new housing backdrop, the future for mortgage interest rates remains mixed. Whilst it is now clear that consumer price inflation appears to be under some control, the future trajectory for interest rates is less certain. Wage inflation is still a little higher than the Monetary Policy Committee (MPC) would like and, whilst core inflation is declining, perhaps not enough for some of the members to feel safe in cutting radically. There appears to be a good degree of latitude for at least one more base rate cut this year and scope for quarterly cuts during 2025. 

Some recent predictions of a 2.75% base rate at the end of 2025 appear overdone to me. Indeed, whilst we may see continuing reductions back to a new floor of 3.00% by the end of 2026, this will be combined with further quantitative tightening that is likely to keep overall Gilt yields and the SWAP curve at a level higher than some of the more optimistic economists are favouring. The implications of this are that the interest rates we currently see in the market are a pretty realistic reflection of a realistic view of the forward interest rate curve. For many, today’s rates might be as good as it gets for some time, and the task facing most advisers is ensuring their customers are fully informed to make good decisions.

It is not just the MPC that has an impact on how the future of money markets and the housing market will develop. All would be well advised to look more deeply at the deliberations of the Financial Policy Committee, with their opinions on financial stability. The cost of borrowing and the stability of the UK housing market is a fundamental building block of the UK economy, and the balance sheet of all our major systemic banks. The last financial crisis means that we have multiple controls to avoid the issues that almost brought about the demise of western economies.

Against this backdrop, we also have the pressure on a tax system that is struggling to fund the levels of government support needed in this modern economy. The private rented sector has for some time been at the front of an assault on its profitability, and controls over lending volumes that has caused some structural realignment. There has been a steady decline in single property landlords with a marked shift to the use of corporate vehicles and multiple units. As a critical part of the UK housing ecosystem, further stigmatisation that these are not ’working businesses’ does little to help encourage an effective mix of options for all types of people.

In conclusion…

There is a real need for this government to give clear and precise guidance to the country, and to the housing and lending industries on the route map to net zero. The plan for retrofit appears a bit like a join-the-dots book at the moment (apologies to Gen Z and younger). Not only do we need to complete the pictures, we have no idea of colours that might be needed. Without clarity on what needs to be done and by when, expectations on grants, and support and maximum expenditures to satisfy requirements for properties of limited value, then we are unlikely to make any real progress. Lenders, surveyors and the advice sector are ready to pull together to help consumers through the maze. At the moment, however, it is too complex to navigate the world of retrofit assessment, installer selection and the financing options for the vast majority of consumers to have any confidence that they will make the right decisions.

There is no shortage of opportunity in a world of turbulence – it will be up to all who are brave enough to step into the unknown to define their own and others’ futures.

© 2024 Association of Mortgage Intermediaries Limited.

AMI is the trading name of The Association of Mortgage Intermediaries Limited which is a company limited by guarantee, registered in England and Wales under the Companies Acts with number 7982341. Our registered address is Celixir House, Stratford Business & Technology Park, Innovation Way, Banbury Road, Stratford-upon-Avon, Warwickshire, CV37 7GZ.

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