On Thursday the Bank of England (BoE) is expected to announce its 10th consecutive rate rise, increasing its base rate by 0.5 per cent to 4 per cent. This will take it to the highest it has been since the 2008 global financial crisis.
However, the consequences of this for mortgage rates are not as great as they once would have been. This is because the cost of borrowing to buy a home spiked far above the BoE’s rate last autumn after former prime minister Liz Truss’s so-called “mini-Budget” rocked financial markets by proposing unfunded tax cuts and caused the cost of providing mortgages to surge for banks who then passed this on to borrowers.
Since that brief and failed experiment in “Trussonomics” the cost of a typical two-year fixed rate mortgage peaked at 6.65 per cent in October according to Moneyfacts. Things have since stabilised with the same type of mortgage now carrying rates of 5.45 per cent. Indeed, as one mortgage broker excitedly told me “one lender is now offering a rate of below 4 per cent on a 10-year fixed rate and it feels like the first time we’ve seen a rate that low in ages”.
There will be much focus on the Bank of England’s rate rise in coming days but the real story here is that Britain’s housing market is between a rock and a hard place. The rock is volatile interest rates, and the hard place is historically high house prices. Together, against a backdrop of stagnant real wages, they have pushed the affordability of buying a home to its lowest level since the 1800s.
Even as house prices fall – by 3.2 per cent since August 2022 according to the latest data from the Nationwide – this remains the case because house prices rose so much during the pandemic, by 16 per cent between July 2021 and July 2022 alone.
And so, homeowners who need to remortgage and those who would like to buy for the first time but do not have huge deposits are in a bind. If you borrowed big at the top of the market, the cost of that borrowing is a lot more expensive now than it was just over two years ago when the Bank Rate was 0.1 per cent.
This could be stopping people from buying homes because they cannot afford them. According to the Bank of England’s own data, demand for mortgages has collapsed to its lowest level since the first lockdown in 2020.
The Bank reports that the number of mortgage approvals – that is, people who want to take a loan to buy a home and are able to get it over the line – has decreased. In December, approvals fell to 35,600 from 46,200 in November amid rising interest rates. That is the lowest figure since May 2020 and the fourth monthly decrease in a row.
According to the Bank’s new figures, the number of remortgages was also down to just 26,100 in December. That is the lowest level since 2013. This could mean that people are looking at high interest rates and deciding against playing with their borrowing.
More on Housing Crisis
House price inflation was not just allowed to run out of control between 2020 and 2022, it was actively encouraged by the Government with policies such as the stamp duty holiday introduced by Rishi Sunak when he was chancellor.
House prices are falling gently from their pandemic peak in most European countries but, unless interest rates drastically reduce in the near future the issue of affordability will remain in much of Britain.
There is no shortage of people who would like to buy a home, particularly given that private rents are currently also at a historic high. The problem is that they cannot afford to borrow to pay the high house prices still present in many parts of the country. This will mean that homeowners who need to sell might not be able to get what they want for their properties and likely lead to further house price falls because sellers will be forced to lower their prices to what buyers can afford and are willing to pay.
If house prices fall significantly – current estimates range between 10 per cent and 20 per cent – the people who will be hurt the most by this are homeowners who borrowed big in recent years with small deposits and risk negative equity (which is where your home is worth less than you bought it for).
We’ve been here before: house prices rise and fall. That volatility is an accepted characteristic of Britain’s housing market even though it causes thousands of people very real financial stress. There is no easy way to square this circle but if the Government was serious about affordability, it would be building more homes that people can actually afford to buy quickly and at scale.
Last year, just 53,487 new build affordable homes were completed.