No mortgage relief any time soon, particularly for the one million-plus households remortgaging this year: that was the takeaway from the Bank of England‘s decision to hold interest rates at 5.25 per cent on Thursday.
Fixed-rate deals are expensive. Variable rates are expensive. Buy-to-let mortgages are expensive. It’s still painful out there for everyone, including private renters who have experienced rent inflation at a rate of 9 per cent.
Are landlords passing their financial pain on? They say no, but rents tell a different story.
The Bank’s rate may come down at the next Monetary Policy Committee (MPC) meeting but, given that the rate of inflation just went back up slightly in the US, causing America’s central bank to hold rates there, it’s fair to say nothing is guaranteed here either.
The average two-year fixed-rate mortgage remains above 5 per cent. For context, when rates started to hit this sort of high following Liz Truss’s mini-Budget, it was described as a “turning point” for the housing market: an abrupt departure from the ultra-low rates homeowners had become acclimatised to following the 2008 financial crisis.
Fast-forward 19 months, and rates of 4.5 to 5 per cent are the new normal, and the “mortgages crisis” is inevitably making fewer headlines.
It’s no less serious now, though.
Britain’s housing market has been in a downturn for over a year. Prices have been falling and the number of homes selling has been low.
The Bank’s decision to hold at 5.25 will further affect the housing market and, crucially, people’s housing costs.
And things are already tough for lots of people.
Data published on Thursday by UK Finance reveal that the number of people who have fallen significantly behind on their mortgages is rising steadily.
In the first quarter of this year, 96,580 homeowners were in arrears of more than 2.5 per cent. That figure is up 3 per cent on the final quarter of 2023.
That figure is lower than it was at the time of the 2008 financial crisis, but it is still significant. It may also not tell the whole story. As housing market analyst Neal Hudson notes, banks are being encouraged to support homeowners, and a number of those struggling may now have switched to interest-only payments, meaning they won’t show up in the arrears data.
Separately, polling by YouGov for the debt charity StepChange shows that nearly one in four (23 per cent) UK mortgage holders have turned to some other form of credit or borrowing in the last three months so that they could keep up with existing borrowing commitments.
The number of buy-to-let landlords whose rented homes are being repossessed has also soared. Six hundred buy-to-let mortgaged homes were repossessed in the first quarter of this year – 20 per cent higher than the final quarter of 2023.
Buy-to-let repossessions can leave renters homeless.
The “mortgages crisis” may have started with Truss, but it hasn’t gone away. Every time a new group of homeowners who took out their loans when rates were lower – two or five years ago – comes off of a fixed-rate and remortgages, this new economic reality hits them.
Data from the Financial Conduct Authority (FCA) suggest that the mortgage repayments of around 800,000 homeowners will go up by more than £200 a month between now and November when the general election is likely to be held in Britain.
More pain for the Conservatives too, then. Particularly because the reality is that short of bringing back the sort of widespread mortgage interest relief seen in the 1990s, there’s little they can do.
The housing market, along with people’s housing costs were always going to be collateral damage in Bank of England’s attempt to control inflation. A calculated risk/reward decision has been taken to prioritise bringing inflation down over alleviating mortgage holders’ financial woes or propping up house prices.
Boom or bubble?
According to the latest data from Halifax, house price growth in April was incredibly slow – at 0.1 per cent. Even though more homes are being listed for sale, higher mortgage rates are limiting what buyers – particularly first-time buyers – can afford.
Despite this, house prices around the country remain at near-historic highs and are unaffordable for many buyers. Some estate agents, such as Savills, have even argued that Britain is about to experience a new housing price boom.
House prices are indeed rising slowly again in some places. But Richard Donnel, research director at Zoopla, is not convinced: he thinks the drag on house prices in London and the South East – where house price falls have been greatest – makes this unlikely.
Mr Hudson, the housing analyst, thinks it’s more likely we could already be in a housing market bubble.
That might sound strange – house prices have been falling and they were higher in 2020, 2021 and early 2022.
But, as Hudson notes, these highs were where you’d expect house prices to be “in relation to low interest rates”.
Now, he says, “there is a big disconnect between house prices and mortgage rates”.
Indeed, more than that, Hudson said that “it feels very like 2005 right now”, referring to the years before the financial crisis when both interest rates and house prices were high.
He added: “I’m not saying that there will be a financial crisis in two years, but more that it feels like there is a very unstable equilibrium at the moment.”
What happens in the next year or so depends on inflation, on interest rates, and on whether unemployment remains low. “Either rates or prices will need to fall to bring things back in line,” said Mr Hudson.
House prices may remain stable in the short term, or even continue to rise in some parts of the country.
But however you slice it the structural issues faced by Britain’s housing market are not going anywhere anytime soon.
These are low affordability (the ratio between earnings and house prices), high interest rates and low numbers of new homes being built.
“If rates don’t fall or unemployment rises, we could well see the housing market return to a state where house prices fall and transactions stall,” Mr Hudson said. “This would be a further step down in the current downturn.”