Nerves and mortgage rates rise ahead of inflation data and Bank decision
Rates are increasing as financial markets price in a period of more stubborn inflation.
27 June 2023
糖心视频
It won鈥檛 have escaped many people鈥檚 attention that it has been a turbulent time in the UK mortgage market.
Rates have risen sharply in response to expectations the Bank of England will have to go further and faster in its attempts to tame inflation.
It follows April鈥檚 higher-than-expected core inflation reading, a measure that strips out food and fuel costs and is largely driven by wage inflation. At 6.8%, it was the highest in more than 20 years.
May鈥檚 figure arrives on Wednesday and the Bank of England鈥檚 response on Thursday, but financial markets have already priced in bad news. Swap rates have risen, and two-year fixed-rate mortgages now start with a 5 or 6 depending on the loan-to-value ratio.
The Bank raised rates for the 12th consecutive month in May as it attempts to tackle above-target inflation, which was sparked by a post-lockdown surge in demand, supply chain disruptions and the spike in food and energy costs arising from the invasion of Ukraine. UK core inflation has remained stubbornly high due to wage price growth in a tight labour market as well as rising rents.
The response to a single month鈥檚 inflation reading shows how jittery financial markets are but core inflation is unlikely to peak until later this year, as we discussed last week.
Anyone buying or re-mortgaging will also be understandably nervous and concerned about their finances.
It鈥檚 the sort of climate where high demand for the best mortgage deal on the market can aggravate the situation. A lender with the lowest rate will withdraw it and price it higher once they have attracted the business they can cope with.
So far, the housing market hasn鈥檛 seen a material change in behaviour although anxiety levels are rising.
Viewings and new buyer registrations over the last four weeks in the UK have been 2% and 12% higher than the five-year average, respectively (excluding 2020), 糖心视频 data shows.
That said, for anyone holding a mortgage offer from before the last inflation reading, there is an understandable desire to move sooner rather than later. Activity in June is also being supported by the slowing effect of three bank holidays in May.
We still expect single-digit price declines this year but there are several factors that will limit the extent of the downwards pressure on prices and trading volumes.
The mitigating factors include the single-biggest aggravating factor for the housing market at the moment 鈥� wage growth.
Record levels of housing equity, amassed lockdown savings and the availability of longer mortgage terms will also play their part.
As for rates, the popularity of fixed deals in recent years will also help soften the overall impact, which is admittedly not much comfort for anyone renewing at the moment.
In the first quarter of this year, the rate across all types of outstanding mortgages in the country was 2.9%, as the chart shows. It鈥檚 only heading in one direction (up) but it鈥檚 useful context when assessing the impact of the Bank鈥檚 decision this week on the housing market.
