Diverging views on peak UK interest rates
Making sense of the latest trends in property and economics from around the globe.
4 minutes to read
Knight Frank has launched its summer UK Residential Property Sentiment Survey, we'd be grateful if you could take part, and we'll share the results over the coming weeks.
A self-perpetuating cycle
UK lenders continue to raise mortgage rates amid an influx of borrowers seeking to lock in deals before they are pulled from the market.
It's a self-perpetuating cycle that appears to be exacerbated by social media. Rolling coverage of mortgage rate hikes prompts a flood of applications to the cheapest lender on the high street, which then pulls its range for fear of doing too much business at rates that could prove loss making. Nationwide was the latest to announce it would increase mortgage rates yesterday, according to today's Times. Its cheapest two-year fixed rate is now 5.74%, up from 5.19% before the change. That follows similar moves by Natwest and HSBC.
"The lenders don’t want to raise rates, but they can’t risk lending at a loss by leaving products out too long while conditions are changing so often," Simon Gammon of Knight Frank Finance tells the paper. “We feel confident that if the inflation figures start to look more positive, swap rates [which reflect expectations of where the base rate will move and which inform mortgage pricing] should moderate and lenders will pass that through to borrowers quite quickly.
“In the absence of better inflation figures, mortgage rates will remain elevated and borrowing will become increasingly subdued. Hopefully that too should cool the spiral of mortgage rate increases that we’re currently seeing.”
Peak rates
This round of volatility has been driven by two bad numbers that prompted a rapid repricing of how high investors believe UK interest rates will peak, as we discussed on Wednesday. Current pricing suggests a peak of 5.75% early next year, up sharply from a projected peak of less than 5% only a month ago.
That's pretty punchy, and whether or not it's justified will become clearer when we see May's inflation print on Wednesday. Many economists take an opposing view - 52 of 64 economists polled by Reuters between June 12th and June 14th believe the base rate will peak by the end of August at 5%. Eleven banks - including five gilt-edged market makers which are primary dealers in UK government bonds - said the peak would be higher, but still only at 5.25%.
It's going to be a subdued year in the property market, with 1.4 million fixed rate deals expiring - many of which are coming off sub-2% mortgage rates - but there are reasons to believe that the prevailing spiral of mortgage market volatility will be fairly short lived.
'Putting in a bottom'
Housing market cycles can be full of false dawns. Back in January, average US 30-year mortgage rates had dropped sharply to 6.15%, from 7% back in just three months earlier. The National Association of Realtors thought that marked the bottom of the cycle, at least when it came to sales.
Mortgage rates stopped trending downwards, and had crept back up to 6.8% as of last week following several hawkish economic data releases. Existing home sales fell another 3.4% in April, while prices slipped 1.7%.
Lennar, the second largest US homebuilder, said yesterday that house prices had fallen about 10% and have likely bottomed out. The company doesn't expect a recovery "for the foreseeable future", and said the outlook was subject to change if interest rates started to creep up again. The average sales price of a new Lennar home now stands at $450,000, down from a peak of $500,000 last year.
The average 30-year mortgage rate eased slightly this week in anticipation the Fed would pause its cycle of interest rate hikes, which it indeed did on Wednesday. Fed Chair Jerome Powell was asked about the outlook for the housing market during his press conference, and took a similar view to Lennar:
"We now see housing putting in a bottom, and maybe moving up a bit," he said, without specifying whether he meant prices or sales.
In other news...
China’s post-pandemic recovery loses momentum after output fall (Times), Canadian home prices climb for a second month (Bloomberg), and finally, who’s afraid of the gilt market? (FT).