Watch the rain….not the jellyPosted on: 10 July 2017 by Peter McGahan
Remorgaging up by 24%, buy-to-let down 60% year on year, Peter McGahan takes a pragmatic look at effect Brexit and a hung Parliament has had on the housing market.
The housing market appears to be retreating slightly in light of many factors but what might it mean for borrowers and buyers alike?
As always, it’s a case of seeing through the noise and being the canary – the live one, not the test one.
Some startling statistics by the Council of Mortgage Lenders might be smoothed over by some, but there is clearly a message there.
Looking at the different borrowers, homeowner borrowing was down 12% on last year (March to March), first time buyers up 12% on the year, and home movers down 33% year on year (by lending volume i.e. the amount of money loaned). (1)
Interestingly remortgaging was up 24% year on year by volume. (1)
Buy-to-let lending is down by a staggering 60% year on year. (1)
It is, therefore, no surprise that asking prices for houses have fallen by as much as 0.4% in June alone (the first June drop in eight years), and they may have further to go. (2)
It’s always easy to make something fit our beliefs – house market is good, house market is bad – but rather than glue jelly to a tree, or shove a river up a hill, I prefer to look at what the information is telling me.
Just watch the rain. It’s neither good nor bad.
We can easily surmise that last year’s anticipation of the increase on stamp duty drove volume higher and the subsequent comparison on volume year on year would always look lower. I’m going to look beyond that at other facts, which point me to some short-term concerns for homeowners and borrowers alike.
Undoubtedly the complete fiasco with Brexit and a hung parliament is unsettling buyers and movers. What will it mean for jobs/for security and for inflation and wages? We covered the drop in real wages and the rise in inflation a couple of weeks ago, so real take home pay is plummeting.
News that the EU block’s economy has returned 200% greater growth than the UK in the opening months of the year will be sending alarm bells as the UK government seemingly climb down on their Brexit requests in the start-up of negotiations. (3)
Costs of production are making their way through into the cost of goods manufactured in the UK as many of the parts are purchased overseas so it’s a triple whammy against the consumer.
Caught between a rock and a hard stone in a tidal wave, it is no surprise borrowers have battened down the hatches, hence the remortgage figures.
The rise in house prices up to now has pushed many properties into that next layer of stamp duty and with the cost of moving on top of that it's clear many are seeking to rebalance the books and clear debt by borrowing against their homes.
After all, with stamp duty/solicitor’s/applications/moving and survey fees etc the cost could easily topple £15,000. It is likely with £68 billion on credit cards, at excessive rates, consumers are remortgaging to the lower rates of borrowing to make life affordable.
Last year, affordability tests made it much more difficult for borrowers to move mortgages, and so borrowers were handcuffed into deals.
Lenders didn’t have to apply this future affordability to remortgaging, but new EU rules remove this option. Watch out.
And so borrowers are now faced with a potential interest rise due to rising inflation (that will not change soon with a plummeting sterling due to the fiasco of Brexit/hung parliaments) as Britain is a net importer and with a weak currency, it will simply worsen. Whether Mr Carney looks through and beyond this is the key.
However, in 2019 borrowers will be faced with a very tricky situation – rising interest rates and a flat economy.
Today borrowers might consider the cost of borrowing on a standard rate versus fixing.
The average monthly interest on a £225,000 mortgage on a standard variable rate (which will rise with interest rates) is £873.75 per month whereas a mortgage broker could achieve a two-year fixed rate at £232 per month. (4,5)
This would see the borrower through to the end of Brexit negotiations but those really concerned about inflation might look at a five-year fixed rate which is £322 per month. (6)
Buying security used to be more expensive, but no more. The writing is on the wall.
Peter McGahan is the owner of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
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