The Post-Election Mortgage Market
Written on 15 July 2024 by
After the change of Government, especially with the new Government having untrammelled power in view of its massive majority, one obvious consideration is what impact this will have on the housing and mortgage market.
In the short term, say until the end of 2025, I think the answer is very little, except that passing a new Renters’ Reform Bill, probably with some amendments unhelpful to landlords, will be prioritised. Any other material changes as a result of Government policy are unlikely to have much impact before 2026.
Labour has focussed on changes to the planning system to improve the provision of new homes and if it can achieve meaningful change there is plenty of potential to increase productivity, with major infrastructure projects as well as new homes. However, unfortunately I see a near zero possibility of Labour meeting its target of 1.5m new homes in the next 5 years. It is starting from a base of around 200,000 per year and any growth will take time, meaning that in the 5th year it will need to build about 400,000 new homes.
As we saw in Q4 2002 following the Truss/Kwarteng budget, developers rapidly reduce housing starts when demand falls and so maintaining demand for new builds will be important. However, relying on the volume builders will not generate an increase to the planned levels. Supply from SME builders used to be important but is now tiny, mainly due to the cost of planning delays and limited access to finance. Also of course there is very little public sector building. To have any chance of even approaching its target Labour will have to address both these issues. Making it easier for self-builders/custom build would also help.
If Labour’s plan to add an additional 300 planning officers can be even partially achieved some of the planning delays should be reduced, but it is not obvious where these new planners are going to be found. As applicants have to pay a fee to submit planning applications, local authority planning departments should at least cover their costs, assuming the fees charged are at an economic level, and so planning departments should be staffed at a level which allows efficient determination of planning applications.
Labour’s policy of changing the National Planning Policy Framework to give Ministers more power to intervene in major planning decisions will hopefully improve the current situation, but the power of small minority groups to cause significant delay and the possibility of Ministers’ decisions being referred to a Judicial Review may blunt Government policy.
Before considering how the housing and mortgage markets are likely to perform in the post-election environment, a quick look as some housing statistics over the term of the last Government might be interesting. Based on Nationwide’s real figures, rather than the manipulated (or seasonally adjusted to use the technical term) one’s prices have changed as follows:
- Over the last month, i.e. June: + 0.7%
- Over the first 6 months of 2024: + 3.3%
- Over the last year: + 1.5% (prices fell in every month in the second half except October)
- During the last Government (December 2019 – June 2024): + 23.3%, an average of 5.2% p.a.
BTL investors are likely to be further disincentivised by new Labour policies, resulting in more small landlords exiting the market. It will need institutional landlords to increase the scale of their investments if the supply of rental properties is to be at least maintained.
In particular it will be impossible, or inordinately expensive, to bring some older rental properties up to an ERC rating of C by 2030 as Labour is planning to mandate. And so, if this policy is enacted, these properties will cease to be available to the rental market, which will be to the benefit of FTBs but will push up rental prices as the supply/demand ratio changes.
The expected cuts in Bank Rate are baked into current fixed rate pricing, with the cheapest 5 year fixes approaching 4% again. As Bank Rate falls the market will get more confident of further cuts, leaving scope for further fixed rate cuts this year and into next year, with the speed of decline depending on the speed of expected Bank Rate cuts.
I expect the spread between 2 and 5 year fixed rates to narrow as rates fall, with headline 5 year fixes down to at least 3.75% and 2 year to 4% by the end of this year.
Extending the Government’s Mortgage Guarantee Scheme will have minimal impact. When this scheme was introduced in 2014 it was an important catalyst in reestablishing the high LTV end of the market, which had still not recovered from the Global Financial Crisis, but with other private sector options such as Own New now available, many lenders find this scheme too expensive and restrictive and prefer other options to support high LTV lending. Incidentally, the GFC meant that the incoming 2010 coalition Government had a far worse economic inheritance than the new Labour Government, despite its claims to have inherited the worst economic situation since the war.
We can expect most lenders to reduce their SVRs broadly in line with Bank Rate cuts and despite tracker rates also, by definition, falling in line with Bank Rate, the starting rate on variable rate mortgages will remain more expensive than fixed rates until Bank Rate is close to where the market expects it to bottom out. Thus trackers and discounted SVRs are likely to continue to only be attractive to borrowers wishing to avoid any ERCs.
Like most comments from politicians, Starmer’s are somewhat economical with the truth but obviously the Truss/Kwarteng budget gave the Labour Party plenty of ammunition. However, the reality is that in Q4 2022, after that notorious budget, mortgage lending fell off a cliff and so relatively few people are actually paying the very high rates of that time, especially as borrowers coming to the end of a deal were able to refix several months in advance (in the increasing rate environment prior to the budget most borrowers getting good advice did so). After Jeremy Hunt steadied the ship by Q1 2023 mortgage rates were broadly back to where they would have been without the Kwarteng budget.
When 2 - 5 year fixed rate mortgages were below 1%, 10 year fixed rate were on offer at under 2% and 30 year at under 3% but most people chose short term benefit over long term security. However, even those taking a fixed rate below 1% would have been stress tested at around 7% and so the much higher rates people coming to the end of a deal now have to pay should in most cases still be affordable, even if it means cutting back on non-essentials.
The fact that arrears and repossessions have risen far less than in the early 1990s, when we had the last really big hike in rates, suggests that mortgage borrowers are prioritising their mortgage payments and cutting back on other expenditure where necessary. With wage increases now exceeding inflation the pressure should be starting to ease for many, although of course not everyone benefits from above inflation wage rises.
The current improving trends in the economy were set in train by Sunak and Hunt and the Bank Rate reductions we expect the MPC to make reflect recent changes in inflation. If Labour manages to implement some of its proposed changes, such as speeding up the planning process, that will help in the medium to long term, but the cuts we expect in interest rates over the next year were largely already baked in before the election.
Any changes in the housing market as a result of the change in Government are unlikely to be material until at least 2026.
Categories:Property Market, Ray Boulger
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