AGENTS shrug off Bank of England rate increase to 3.5%
Bank's MPC today voted to raise interest rates by 0.5% from 3% to 3.5% but most agents think property market won't fall over.
The Bank of England today voted to raise interest rates by 0.5% from 3% to 3.5% – a level not seen since October 2008.
The ninth consecutive rise means that again some mortgages – especially those on tracker and variable rates – will spike once more and new deals will become less affordable to would-be movers.
At its meeting the Bank’s Monetary Policy Committee voted by a majority of 6-3 to increase Bank Rate by 0.5%, to 3.5%. Two members preferred to maintain Bank Rate at 3%, and one member preferred to increase Bank Rate by 0.75% points, to 3.75%.
INFLATION
Inflation fell from 11.1% in October to 10.7% in November – slightly below expectations. The Bank says that while the introduction of the Energy Price Guarantee (EPG) in October has limited the rise in CPI inflation, the contribution of household energy bills to inflation has risen further.
Since the MPC’s previous meeting, core goods price inflation has fallen back, while annual food and services price inflation have strengthened.
MORE RATE RISES
The Bank also warned of the prospect of further rate rises.
It says: “The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response.
“The majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target (2%).
“There are considerable uncertainties around the outlook. The Committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary.”
INDUSTRY REACTION
Inflation is expected to continue to fall gradually over the first quarter of 2023, as earlier increases in energy and other goods prices drop out of the annual comparison. But how has the industry reacted to the latest rate rise?
Marc von Grundherr (pictured), Director of Benham and Reeves, says: “There’s certainly no cold snap on the cards where interest rates are concerned with yet another substantial increase pushing the base rate to a 14-year high.
“This will be as welcomed by homeowners as the proverbial lump of coal on Christmas morning, with those on variable rate products now facing yet another immediate increase in their monthly mortgage payments.
“With many households struggling to heat their homes in these arctic conditions, this will be the last thing they need in the run up to Christmas.”
James Forrester (pictured), Managing Director of Barrows and Forrester, adds: “A ninth consecutive increase in interest rates will do little to boost a weary property market that is already showing signs of wear and tear due to the higher cost of borrowing, with buyer demand falling and house prices now following suit.
“While a Christmas interest rate increase is as desirable as a pair of socks from your aunty, the silver lining to today’s latest hike is that this should hopefully be the peak, with less chance of a further increase on the cards for 2023.
The New Year should bring a far more settled outlook for the UK property market.”
“Should this be the case, the New Year should bring a far more settled outlook for the UK property market, as we adjust to a new normal following a turbulent few months.”
Pundits say the rise to 3.5% is unlikely to be the peak for base rate but Mark Harris (pictured), Chief Executive of mortgage broker SPF Private Clients, says that interest rates don’t needs to, or can go, much higher.
He says: “Fixed rates are influenced by future base rate movements and therefore not directly linked to what is decided this week.
“Indeed, the pricing of fixed-rate mortgages, which soared after the mini-Budget, continues to drift slowly down, with 5-year fixes breaching the 4.5% barrier this week and expected to drop below 4% in the new year. Come 2023, we could see 5-year fixes priced below base rate.”
Dominic Agace, Chief Executive of Winkworth (pictured), says he expects the increase to have a muted effect, with rates on 2 and 5-year fixes set to continue to decline into the New Year to reflect the return of swap rates to pre-mini budget levels easing pressures on those coming off fixed rates in 2023.
People move for different reasons and that isn’t going to change.”
Jason Tebb, Chief Executive of OnTheMarket, adds: “The ninth rate rise in as many meetings will further exacerbate increasingly stretched affordability and is bound to affect the confidence of the average property-seeker.”
But he says: “The housing market continues to rebalance in terms of supply and demand, with the aspiration to buy property remaining despite everything.
“People move for different reasons and that isn’t going to change, even if market conditions are tougher.”
Jeremy Leaf, north London estate agent and a former RICS residential chairman, says: “Such a substantial increase in base rate is alarming, particularly for its impact on confidence to buy property, which can compromise activity in the housing market.
“However, this rise has been expected for some time, with lenders already factoring it into pricing of fixed-rate mortgages. Indeed, brokers tell us that they don’t expect these to go any higher; if anything, they are likely to stay the same or continue falling slowly.
“Existing sales are proceeding, while new buyers are thin on the ground and deciding on next steps over the holiday period. We expect them to slowly return but negotiate hard, aware that the balance has shifted very quickly their way and they will do their best to take advantage.”
STIMULUS
Tomer Aboody (pictured), Director of lender MT Finance, says the government would be wise to consider some kind of market stimulus to boost the housing market.
He says: Although borrowers will feel that rate rises are coming thick and fast, hopefully this will succeed in getting double-digit inflation under control quicker. The Prime Minister and his team will then need to come up with some stimulus to turn up the economy and ensure the hurt isn’t long term.
“As rates rise and the cost-of-living increases, the negative impact on the housing market is inevitable. Given the importance of the housing market to the wider economy, the government needs to provide some form of assistance to stimulate the market.
“This could take the form of a restructure of stamp duty or some form of mortgage interest tax relief to alleviate some of the many stresses that borrowers will face in coming months.”
The Bank of England base rate has gone from 0.1% in November 2021, to 3.5%, that is a 35 x’s multiplier in 12 months. Inflation in November 2021 was 5.99% now it is 10.7%. The average mortgage in the UK is £118,000. For a first time buyer and that is one third of buyers each year 403,000 of them, those getting a mortgage borrow £195,000 on average.
Given that by mid 2023, the base rate is likely to be 4.5% plus, I see that until the Russian war ends, the housing market will be similar to 2008.
Completely unnecessary and purely a consequence of the BoE’s previous misreading of the climate and subsequent inaction. ‘..the contribution of household energy bills to inflation has risen further’ – so how does this rate rise help?