Lenders begin the year by slashing mortgage rates
Making sense of the latest trends in property and economics from around the globe
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Lenders have started the year with some sizable reductions to mortgage rates.
Both Halifax and Leeds Building Society announced cuts within hours of the start of the first working day of the year, according to this morning's Times. Halifax cut its two-year fixed rate aimed at existing customers by 0.83% to 4.81%. Leeds cut rates on many of its products by up to 0.49%.
The UK's annual rate of inflation dropped to 3.9% in the twelve months to November, dramatically cutting the likelihood that the Bank of England would continue hiking and paving the way for lenders to reduce rates through January. The banks begin the year with fresh targets and a battle for market share is underway in a reduced market. UK property transactions fell 22% in November compared to the same period a year earlier, according to official figures published on December 29th.
Stagnation
The next inflation release on January 17th will be an important moment. Further evidence that inflation is beaten should bring down longer-term interest rates, which will enable the lenders to keep reducing mortgage rates.
While that's positive, the 600,000-odd people rolling off sub-2.5% mortgages in the first six months of the year will face a painful hit to their disposable income. More relief will come as the year progresses. Investors are betting that the Bank of England could make as many as six cuts over the course of the year, with the first beginning in May.
Those cuts can't come soon enough for UK businesses wilting under the pressure of economic stagnation. In an FT survey of 90 economists, almost every respondent suggested that economic growth would come in flat or hit 0.5% at best this year. A separate survey measuring directors' optimism for the next twelve months, conducted by Institute of Directors and out this morning, sank to a four month low.
"An early cut in interest rates would be justified in terms of helping to kick-start business confidence,” says IOD director of policy Roger Barker.
House prices
House prices were flat between November and December, Nationwide said on December 29th. The 1.8% drop over the course of the year leaves values down 4.5% from the all-time high recorded in late summer 2022.
The total number of transactions ran at circa 10% below pre-pandemic levels over the final six months of the year, with those involving a mortgage down by a fifth. Cash transactions continue to run above pre-Covid levels.
“It appears likely that a combination of solid income growth, together with modestly lower house prices and mortgage rates, will gradually improve affordability over time, with housing market activity remaining fairly subdued in the interim," said Robert Gardner, Nationwide's Chief Economist.
Indeed, the picture is particularly difficult for those at the bottom of the ladder. A borrower earning the average UK income and buying a typical first-time buyer property with a 20% deposit would have a monthly mortgage payment equivalent to 38% of take-home pay – well above the long run average of 30%, the lender said.
Affordability
Stretched affordability and the end of Help to Buy pushed the number of first time buyers down to 290,000 during 2023, down 22% on the same period a year earlier, Yorkshire Building Society said in a report covered by the Times this morning.
As I've said in previous notes, this looks awful for the Conservatives, who are trying to find some momentum in the early phases of election campaigning. A Boxing Day report from the Times included a pledge from Michael Gove to have a new offer for first time buyers by polling day. Options on the table include "a scheme to provide government support for much longer fixed-term mortgages to reduce how much first-time buyers must find for a deposit" or resurrecting a version of Help to Buy.
"Ministers are also looking again at stamp duty and some in favour of scrapping the tax altogether, arguing that it distorts the housing market by discouraging people from moving," according to the report.
Labour used the Christmas period to announce it would tighten up the rules on Right to Buy, according to the FT.
In other news...
Britain faces fresh inflation headache as Maersk suspends shipments (Telegraph), warehouse operators turn to entertainment and food facilities to attract workers (FT), two-thirds of English housebuilding fund unspent despite homes crisis (FT), Labour considers tax cuts to become ‘party of aspiration’ (Times), and finally, Manhattan home prices rise in early sign of a market rebound (Bloomberg).