UK Interest/Mortgage Rates – WHO’S in control?

[Isitmebut]

The Bank of England on ‘forward guidance’ had indicated that interest rates (the Base Rate) was unlikely to go up from it’s 0.50% all time low UNTIL the UK unemployment rate fell to 7.0%, a level not expected until 2016 – so the fall in unemployment to 7.1% this month, is causing interest rate confusion, but who actually controls the interest rates that matter e.g. 2,3,& 5 - year fixed rate mortgages?

The short answer is NOT the Bank of England, it is the capital markets, as it is the buying and selling of the major institutional investors e.g. global pension funds, in global government bonds like UK Gilts, that determines the interest rates on every maturity EXCEPT the very short dated Base Rate, in the 2, 3,5,7,10 and 30-year bond issues.

So why does this matter to the likes of 2 to 5-year (and beyond) Fixed Rate Mortgages?

It matters as the government bond yield curve from 2 to 30-years ESTABLISHES THE FLOOR on bank lending rates, as banks can rarely borrow cheaper from the capital markets than the better quality/rated government to fund themselves, and lend money on to businesses and consumers.

My point being, is that with the best will in the world, the BoE does not control commercial interest rates, IT IS THE UK GOVERNMENTS CREDIT WORTHINESS (AND EXPECTED FUTURE INFLATION RATES) THAT DETERMINES our interest rates, as it is that market perception that means there are MORE buyers than sellers of UK Gilts, which brings interest rates down.

So will the BoE raise the Base rate from 0,50% anytime soon? It is highly unlikely, but in the February inflation report, they are likely to publish new guidelines, possibly based on other economic data than the traditional inflation and more recently targetted unemployment, reports.

What we have to remember is that the Base Rate in ‘normal’ times can be 2 to 4% OVER the UK inflation rate, now well below 3%, so once the BoE believes that UK economic conditions is anything like normal, the Base Rate and 2 to 30-year UK Gilts will (relatively) substantially move UP in yields (interest rates), in turn driving bank Fixed Rate Mortgage rates higher.

Many fear that a knee jerk rise in interest rates will both choke off the economic recovery and cause a correction downward in home prices, but clearly as everyone expects interest rates to rise, the MORE businesses and home owners that lock in their borrowing costs for years ahead, the less the economic and house price fallout will be. In my opinion.

It's hardly a punishment, when for example the owner of the hose above would have made £2.5 million profit since 1997

AgaPanthers……I’m guessing that you haven’t had too much experience re the stress on elderly people being forced to move from homes where they have roots, may have brought up families, still have friends – kicking and screaming, being told its ‘for their own good’?

Most of these people were never consulted on, never mind voted on, the secret policies that produced such an imbalanced housing supply/demand equation - and I suspect if given the choice of stay or a larger profit/more Stamp Tax, would rather stay where they are NOT be forced to move for financial reason - arguably as a result of a socialists upper class Bedroom Tax.

Labour has a bit of form attacking the elderly; the measly rises in the State pension over 10-years of quango plenty, didn’t they throw a 72p rise around 2000, to help those 'cost of living' ends meet?

Isn’t Labour currently promising ANOTHER pension raid in 2015 if they get in power, on top of the one they didn’t tell voters about before the 1997 General Election? Even before the 300-year record low interest rates/Quantitative Easing affecting the annual income from pension annuities – actuaries calculated that Labour had cost pensions over £100 billion and closed many Private Sector final salary schemes.

www.dailymail.co.uk/news/article-1266662/The-man-stole-old-age-How-Gordon-Brown-secretly-imposed-ruinous-tax-wrecked-retirements-millions.html

www.telegraph.co.uk/finance/personalfinance/pensions/10698432/Final-salary-pensions-10-times-more-common-in-public-sector.html

I think Labour has done enough damage to the INCOMES of pensioners, so I’d suggest that when they form the next administration in 2015, possibly with a pro Mansion Tax Lib Dems, they exclude those elderly people who may be home asset rich, but income poor, rather than just assume anyone who has saved all their lives, are just (the wealthy and) fair game.

It is right that governments should be concerned about home prices moving up too fast, especially versus earnings multiples, as overstretched buyers will get hurt most when a housing bubble is formed. But governments should be slightly more concerned if the Uk either doesn’t have enough homes to cope with current demand or there are regional shortages and we have both of those.

What was clear was that we could not have the unavailability of mortgages, along with ongoing recession jitters e.g. talk of a ‘triple dip’ recession creating a lack of confidence, cause a continuation in the log-jam within the property market, where those that need to move, could do so – and large builders that suffered over the recession, had the confidence to build new homes. So where are we now?

A year or so later as a bit of economic and financial confidence returned and government measures to help people obtain mortgages (which allows those higher up the ladder to move) - and quarterly Building Home Starts have reached the pre 2007 – we have warnings of a bubble.

“Housing bubble brewing – prices are now unaffordable for middle earners, says Business Secretary Vince Cable”

www.independent.co.uk/news/uk/politics/exclusive-housing-bubble-brewing-as-prices-become-unaffordable-for-middle-earners-says-business-secretary-vince-cable-9236587.html

“Home ownership has now become “unaffordable” to people on middle incomes, Vince Cable admitted, as he warned that the bubble developing in the housing market could be more serious than during the last property crash.”

“Amid growing tension between the Conservatives and Liberal Democrats over rising house prices, the Business Secretary told The Independent: “The fundamental problem is a chronic imbalance between supply and demand. A recovering mortgage market is just fuelling demand again.”

“The Lib Dem minister said that, in the mid-1990s, the average house price was three times average earnings. Today, at roughly the same stage of the economic cycle, the ratio is about 5.5. It rose to more than six before the crash of 2007.”

And few can argue that home prices are unaffordable, especially in various regions down south, but how long have we been saying that – so is the answer a freeze on mortgages and people moving – and practically how would that work?

Basically it can’t work, so we have to both analyse the problem sensibly and look at what options we do have.

First of all I challenge Mr Cables figures re Property Price/Earnings ratio, which I believe distorts the true picture by using the mid 1990’s property price and the pre crash late 2007 mortgage availability.

In the mid 1990’s we were a few years into the 1990ish recession here, in Europe and the U.S., and home prices hardly moved to dipped in PRICE terms, but in REAL terms (taking account of rising inflation each year), home prices fell dramatically – and it was that ‘real’ price fall in a relatively shallow recession, that made homes attractive on historical valuation, especially to those who were giving decent ABOVE inflation salary increases.

Fast forward to late 2007, a global economic boom, UK prices going through the roof (ahem), and mortgage money well over 5 x that in 1997 was available to anyone with a pulse e.g. Self Cert where the self employed buyer was trusted to state their own income.

The point I’m trying to make here is taking those two extremes, that Mr Cable tells us provided 3 times and 6 times in 2007, where is the AVERAGE considered to still be expensive, BUT SUSTAINABLE, until we build more bleedin’ homes?

Furthermore as we get ever closer to ‘positive’ wages-over-inflation and a Base Rate coming off of an all time low, that wasn’t available on the BoE’s first day in 1600 and something or other, those factors will take some of the mortgage demand/affordability pressures off a potential ‘bubble’ situation – especially when we all agree, we need more bleedin’ homes and now having reached pre crash start levels, we are on that right road, finally.

Conclusion; a home/price multiple of 3 with a huge home shortage is unobtainable so maybe 4 -4 ½ is the new sustainable norm, mortgage lending & affordability has been far more responsible since 2007, stronger homes build growth rates likely, higher interest rates to ease pre rise extra demand, the BoE mandated to stop a bubble and could limit mortgage offers = no bubble anytime soon. IMO.

Any other thoughts?

More evidence that the property market is reacting to supply/demand fundamentals and therefore cannot really be classified as a ‘bubble’ - built on froth and liable for a sustained correction.

Today; "Immigration from Eastern Europe was massively underestimated, says official report"

Office for National Statistics admits it missed an estimated 350,000 in net migration over a decade because of flaws in a key survey

www.telegraph.co.uk/news/uknews/immigration/10757336/Immigration-from-eastern-Europe-was-massively-underestimated-says-official-report.html

The number of eastern European migrants who came to Britain in the last decade was hundreds of thousands higher than previously thought, the Office for National Statistics has admitted.

In a disclosure that will fuel intense national concern about immigration, the agency said it had failed to count an estimated 350,000 migrants who arrived in this country between 2001 and 2011.

And although Home Building Starts are now around late 2007/ early 2008 pre crash levels, the current demand is fuelled by a relatively small percentage of Right to Buy, record number of home owners are Fixing Mortgages to protect themselves against the interest rate rise AND the strength in the homes markets is both regionally broad based and outside London, and prices are still well below the bubble late 2007/ early 2008 levels.

"House price boom ripples out of London, across Britain"

"Property sales highest for six years amid “truly national” market recovery, experts say"

www.telegraph.co.uk/finance/personalfinance/houseprices/10756343/House-price-boom-ripples-out-of-London-across-Britain.html

"The housing boom is spreading across the country, with rapidly rising prices and long queues of buyers no longer restricted to London, experts are to announce."

"Property sales in the first three months of 2014 reached a six-year high as the market recovered on a “truly national” scale, according to the Royal Institution of Chartered Surveyors (Rics)."

"Activity is at levels last seen in early 2008, before the banking crisis took hold, and is spreading to the Home Counties and beyond, figures suggest."

"The trend is “striking in that it is clearly broadening out”, said Simon Rubinsohn, a Rics economist. “There has been a sense that it was one story for London and a very different outlook everywhere else, with perhaps a few other city centres edging ahead. But that is not the case any longer,” he added."

“Now that the housing market recovery is well and truly under way and mortgage finance is more readily available, buyers seem to be looking to test the market right across the country, not just in the usual hotspots of the South East.”

"Rics’ 513 branches of estate agents and valuers in England and Wales reported average sales of 23 properties each in the first quarter of the year. This is up from a low of 12 in 2009. In mid-2007, the peak of the last housing boom, chartered surveyors were selling properties at a rate of about 40 per quarter."

"Prices were also on the rise. Rics has pushed up its forecast for national house price growth this year from six per cent to eight per cent. Its surveyors were most optimistic about price rises in the East Midlands and the North West."

The expectation of new mortgage regulations coming in this weekend (April 26th) appears to have already slowed down home mortgage approvals in the months before, and the new examination into affordability where every financial outgoing (no matter how small) is assessed, surely means approvals will slow further.

Especially as in addition, fixed interest mortgage rate offers have been firming slightly, despite the BoE’s assurances that our Base Rate will not be rising soon, and very gradually when they do.

However as the markets see the strength of the rebound in our economy versus the other major economies e.g. unemployment down from 7.9% to 6.9% in a year, they will expect the UK’s BoE to be the first of the G7 to raise their benchmark rate and start to price it into the market, for whenever that rise comes to begin the ‘normalising’ of UK interest rates – even as the negative threat of inflation on rates recedes, recently dipping to 1.6%.

New mortgage rules 'will slow transactions’

www.estateagenttoday.co.uk/695-new-mortgage-rules-will-slow-transactions

“There were 65,498 house purchase approvals by lenders in March, showing the second successive monthly drop as mortgage firms test out stricter rules which will be implemented across the country at the end of this month.”

“The March figure was seven per cent lower than the 70,309 in February. The recent falls reverse 11 months of improvements which saw average monthly lending levels increase from 52,537 to 76,753 between February 2013 and January 2014.”

“The new Mortgage Market Review regulations, due to be introduced on April 26, will see increased affordability checks conducted by lenders, with the application process lengthening considerably.”

“Lenders are already putting in place changes to fit the new regulation, to ensure a seamless transition to the new rules in April.”
“Richard Sexton, director of e.surv chartered surveyors, which conducted the survey of purchase approvals, says this is a “period of transformation” for the industry.”

“New regulations have played a part in the slowdown. Lenders are trialling systems, tightening up affordability checks, training staff and putting in place lengthier advisory processes. House purchase lending has dipped as a result” he says.”

“Meanwhile the e.surv research has also shown that the number of high LTV borrowers has now risen to one-in-six of all successful applicants. There were 9,628 loans to borrowers with a deposit worth 15 per cent or less of the total value of their property in March - this is half as much again as the figure a year earlier.”

“This confirms a recent Bank of England Credit Conditions Survey which showed that high LTV loans increased significantly in the first three months of this year, fuelling some observers’ concerns of a possible housing market bubble.”

The Economic and Interest rate norm built into the BoE’s policy thinking now, is apparently heading for ‘normal’ over the next 2-years.

Today’s Bank of England’s report on growth & inflation etc sounded encouraging for the continuation of a growing economy, with the unemployment rate down from 6.8% announced today to 5.9%, plus mentioned that our historically low UK Base Rate increases would be "gradual" and that the rate "may stay at historically low levels for some time", before normalising.

In the past ‘normalising’ meant our Base Rate 1-2% plus ABOVE inflation, so it was interesting that in 2-years time, the BoE’s inflation forecast is just under 2.4% - so for those with mortgages who have already Fixed their rate, they need to try and financially anticipate the affects on their finances if our interest rates then normally ‘discount’ rising inflation and are much higher than now. IMO.

On the homes built side of the supply/demand equation mismatch, which is still below the 210,000 a year plus we need (that was forecasted a decade ago in 2004 by the Barker Report) but is also heading in the right direct.
www.gov.uk/government/news/extra-borrowing-powers-for-councils-to-build-10000-affordable-homes

“Home starts in England predicted to rise by 20% in 2014”
www.insidehousing.co.uk/home-starts-in-england-predicted-to-rise-by-20-in-2014/7001343.article

“New starts in England are predicted to increase by 20 per cent in 2014, according to an annual housing market forecast by RICS.”

The Bank of England Governor Carney, having been given new responsibility by Osborne at the beginning of this parliament to head off any new housing bubble at the pass, in speaking out so strongly about ‘the deep structural problems’ within the UK homes market, he has made clear three points IMO;

1. Giving one-on-one media interviews over the past few days (after the BoE’s quarterly report) and intimating we are building less that half the homes we need, he confirmed the bleedin’ obvious in 2004 (see link below), never mind now - and both lowered expectations that he can work anti-market forces miracles via the BoE, and put in place some early good old North American C.Y.A.

www.theguardian.com/money/2004/mar/17/business.housing

1. Warned Osborne and the rest of the politicians that the BoE can only do so much to stop a housing price bubble and that this country needs fresh initiatives to encourage more urgent home building on top of policies like Help to Buy - that OUTSIDE London and the South East, areas still relatively depressed (in home price terms) since 2007 - builder have relied heavily on the scheme to sell homes i.e. in the North West & East, where regionally a larger proportion of Help to Buy transactions have happened versus London.

But while Help to Buy initially unblocked the bank lending logjam, thereby helping transaction liquidity on all rungs of the housing ladder, especially those that may have needed to sell for financial reasons but couldn’t, there is a growing consensus that as both confidence and the economy is growing – scaling the governments help back and/or reducing the 2016 end date will be prudent.

1. Has warned the financial institutions mortgage lending (via what used to be called in the ‘the governors eyebrows’) that without any new regulation from the BoE on lending criteria e.g. loan multiples - he fully expects them to exercise loan restraint themselves - otherwise he’ll slap them with new lending regulations.

By late 2007, bank balance sheet multiples were way too high and their lending criteria way too lax, resulting in too much money being loaned badly, neither of which were the cause of the current price rises.

So HOME BUIDING, or rather lack of, is a key component in price rises since bank balance sheets multiplied from the late 1990’s – and that has to be the Coalitions main focus in the year ahead.

The problem is, on top of the help Osborne has given the whole of the Private Sector in each budget from 2010 to help build up their confidence to invest/hire again, _it is tough to imagine a new homes initiative put before parliament before the 2015 General Election.

But I hope that, rather than THREATS to tax companies and home build numbers plucked out of the air like some political parties, that Osborne has firm ideas to finance private and public home building is in their 2015 manifesto, for that new parliament, should they at least be the largest party within it.

I think all this talk is preparing for a sharp price correction. The housing market is so out of control now that where previously falling prices was a sure fire election loser now I think it could well be a winner

Noddyholder …… alas I don’t agree with you, as we had our big correction a year or so into the crash and the price averages went down by around 20%, but there were not many transactions that could go on due to the lack of mortgage offers – so prices rebounded to where they are now DUE to the huge structural demand for homes.

The (2004) Barker review – pre EU immigration Barker recommended that we had to DOUBLE home building back then.

www.theguardian.com/money/2004/mar/17/business.housing
"Kate Barker, a member of the monetary policy committee, was asked a year ago by Gordon Brown and the deputy prime minister John Prescott to carry out a review of the housing market in the UK."

Shelter (2009); The housing crisis in numbers – and the need for spare bedrooms, never mind homes.
england.shelter.org.uk/campaigns/why_we_campaign/the_housing_crisis/what_is_the_housing_crisis.

• Over 1.7 million households (around 5 million individuals) are currently waiting for social housing
• 7.4 million homes in England fail to meet the Government's Decent Homes Standard
• 1.4 million children in England live in bad housing. [3]
• In 2008/09, 654,000 households in England were overcrowded. [4]
• The number of new households is increasing faster than the number of house builds.

And that is at the poorer end of society, where they have no option to buy.

So I reiterate the price rises we are seeing, which are by no means regionally uniform, are NOT caused by the sheer weight of money available to borrowers before the crash together with a homes shortage, it is just the HOMES SHORTAGE driving up prices.

IMO the only chance of a decent home price correction is on another financial crash, so we should be careful what we wish for.

We shall see I think the recovery is not real and based on debt I think rices will fall as rates rise. The Bank of England saying in order to implement rises slowly they need to start ASAP which means 8 months earlier than their original prediction I am hopeful

Noddyholder …. I doubt if we’d get over 1.5 million jobs over the last few years (around 1 million full time) if this recovery was built on debt – in fact the national figures show that debt is not the driver of our growth.

"Latest UK GDP data shows economic recovery is broad based and balanced: Henderson"

www.whatinvestment.co.uk/financial-news/markets/2455072/latest-uk-gdp-data-shows-economic-recovery-is-broad-based-and-balanced-henderson.thtml

“The latest data regarding UK GDP, published by the Office for National Statistics this morning, disproves the theory that the UK’s economic recovery is ‘unbalanced’, according to Simon Ward, economist at Henderson Global Investors.”

“Investment soared by 8.7 per cent and business fixed capital formation grew by 8.5 per cent, with a stronger rise in housing investment’."

“He continued that consumer spending, previously a key driver of UK economic growth, rose at a slower rate than overall GDP growth – consumer spending rose by 2.4 per cent, while for the 12 months to the start of the fourth quarter, GDP rose by 2.7 per cent.”

I don't agree sorry. Lots of part time and zero contracts and credit per capita in this country is huge. As I said we will have to differ I think the price crash people have been wanting is on it's way now as every cock and bull scheme has been tried and just fuelled more debt.

"Every cock and bull scheme" OTHER than not catch up with Home building, since we had a few million new citizens in the 2000's' and only averaging 115,000 new homes.

If everyone owning a home is on zero contracts, have not benefited from 300-year low interest rates, the majority did not have decent equity in their homes and for the debt accumulated from the 2000's there are savings earning diddly - I'd agree with you.

But whether a first time buyer with an average age of what is it now, 36, 39 or a renter, they still need somewhere to live and we can no longer rely on Sheerluck Homes fiction and characters to build them - but until they do, the 'demand' support is too strong.

To my mind the problem will be when the wrinklies want to sell the expensive homes and move smaller, to compete on homes with those with growing families looking to trade larger, that will happen whether any Mansion Taxes force those sales or not.

They have benefitted from low rates I agree. I think the demand thing is fair enough until lending starts getting restricted and rates rise. As I said I predict at least a 10% fall by this time next year if not sooner.I sold my flat luckily when prices were buoyant but already agents are saying I was just in time. I have been buying and selling for 15 years and price dips are surprisingly easy to spot

noddyholder ….. hmmmm . Firsty I suspect that for every agent having told a seller they were just in time, there is a spotty estate agent telling twice as many buyers, exactly the same.

As to your price fall predictions, as long as it is not a micro area you are focusing on, if there was a 10% fall in prices across a region etc, I would eat your (Ariel cleaned) shorts.

Many home owners have been ‘hedging’ their upward interest rate risk and I’d expect a lot more to do the same over the rest of this year – prolonging the issue of debt affordability for 2-3 years, when they need to be re-fixed. IMO.

“Record number of UK homebuyers rush to fix mortgage rates”
www.ft.com/cms/s/0/02a1f2d0-b350-11e3-b891-00144feabdc0.html#axzz32S0ekm4u

“An unprecedented number of housebuyers are opting for fixed-rate mortgage deals, as lenders start to increase rates from rock-bottom and UK property prices continue to rise.”

“More than 19 of 20 people seeking a mortgage in February opted for a fixed rate, beating the previous record set at the start of the year, according to figures from the Mortgage Advice Bureau, a broker.”

“The rush comes as the average interest rates for two, three and five-year fixed mortgages rose 0.06-0.08 percentage points between January and February.

"Two and three year mortgage rates hit record lows of 3.52 per cent and 3.83 per cent respectively at the start of the year, while five-year deals reached a low in August and have steadily crept up since.”

They are not telling me for those reasons though as I have bought more than 20 properties in the last 10 years and they know me well tbh. I do know my area well and I am fairly confident they aren't spinning me any lines they know I am fairly good at what I do have made a good living at it. Lets see I'll be back here at Xmas to let you have my shorts

A deal, but just in case, Ariel POWDER, mind, I don't trust the liquids/gels enough with someone I don't know. lol

Banks need to recapitalise and not fall into the over lending trap again. This has started with Halifax yesterday capping loans over 500k at 4x salary and considering they are 18% London it will have an effect. Others are sure to follow suit according to todays FT. It is all very well fixing now for 2 years but with rate rise and MMR I am not sure there will so many 'deals' when those rates run out. A close friend just tried to remortgage her bungalow to extend plenty of equity but was turned down on affordability and they aren't exactly short of money!

I am a persil girl sorry!

I think others will follow Lloyds covers Halifax Scottish widows bank and Bank of scotland. No bank can risk going under again as I don't think bail outs will be on the agenda like they were previously.

To borrow 500 they need 125k joint/single. Lots of 700k plus bog standard terraces in the SE so not that unusual. I have someone an older man who has been advising me for years wrote for broadsheets in finance as a career now retired.He is convinced that we are being prepared for falls. Carney and co have said in order to make rises gradual they need to start sooner which I think is wise as a big jump in one go would cripple people. He says his cronies are now saying that price falls would not be such a disaster in terms of the election as it once was as there are many more people who agree now that rises can't continue.

Jan February was def the peak. I am in the SE it was crazy here as help to buy kicked in developers waited for it and upped their price I have several mates who did this. It has definitely slowed more houses just sitting there. I attempted to buy an old wreck which was 379 I offered 330 they said no in feb. Rang me Friday and said executors would now take 300 cash as they had 4 offers unable to finance. I think change is definitely afoot.

Govt borrowing also sharply up in April although the forecast last year was for borrowing to fall. It is being revised up for march too.