“It’s much more interesting to live not knowing than to have answers that might be wrong.”
When the late US theoretical physicist, Richard Feynman, said this in the last century, it is highly unlikely he was thinking about interest rate movements. But for those trying to second guess where inflation (and, by association, interest rates) is headed – particularly in the medium term — the word ‘interesting’ is probably ill suited.
It is hard to remember a time when so little could be taken as given. Imminent energy performance certificate regulations now put on hold. No-fault eviction rules abandoned — for now. Inflation not falling as anticipated.
Many experts now believe the base rate has hit its highest point
And with this currently sticky inflation come expectations of rate freezes, and whispers of even higher rates; possibly not now but over the next year.
Should we expect the turbulent market of 2023 to continue as we head towards 2024?
Accord Mortgages director of intermediaries Jeremy Duncombe thinks there will be more general stability but not a huge difference in the market in 2024.
“I suspect it will be a pretty flat market next year. We will likely see around £210bn–£215bn in gross lending, so similar to this year.”
Given that rising fuel prices were cited as a key factor in the surprising stickiness of inflation (and factoring in escalating geopolitical tensions right now), what chance that these prices will soften any time soon? Arguably, very slim.
Against this backdrop, which way will the Monetary Policy Committee turn on base rates? The consensus for now, and the early part of 2024, is for little change.
There is reason to be optimistic. Declining prices offer a chance for first-time buyers
It is early days. As Rightmove mortgage expert Matt Smith points out, the recent inflation numbers have not (yet) had any material impact on rates, and they’ve continued to slowly creep downwards.
But, as Hargreaves Lansdown head of money and markets Susannah Streeter observes, given the stop-start nature of the downwards march of inflation and its very stubborn tendencies, any meaningful downwards trend in interest rates doesn’t look likely until the second half of next year, particularly with oil prices remaining elevated among geopolitical tensions.
Duncombe takes a similar line, saying: “We still have high oil prices and it is difficult to see how the situations in the Middle East and Ukraine will play out. As to when inflation will come down meaningfully — it could be the end of 2024.”
In recent weeks we have seen a smattering of sub-5% deals, but is this as good as it gets? Duncombe does not see much flexibility for lenders — at least in the current climate.
“With swap rates at 4.6%, there is not much scope for lenders to go below 5%.”
Any further increases in interest rates will only place additional stress on an already depressed market
WPP Financial Services principal Michael Welton believes the sub-5% mortgage rate will become the prevailing standard in 2024. However, given the ongoing global uncertainty, it is challenging to forecast how much lower it might go.
In a turbulent market, Welton believes the biggest question will be, ‘How long to lock in for?’
“This depends on each client’s situation. The UK public are obsessed with interest rates. If the client is particularly nervous, the key figure to discuss is the physical mortgage payment.
“If a five-year fixed-rate payment is affordable and within budget, the client should take up that option. However, most clients want a shorter fixed rate, with three years becoming more popular. This gives them the opportunity to review the options again in the short term rather than lock in to a higher rate for a longer period”.
We still have high oil prices and it is difficult to see how the situations in the Middle East and Ukraine will play out
Other figures to catch the eye over the past month relate to house prices and levels of mortgage business. The latest Office for National Statistics report shows average UK house prices increased by just 0.2% in the 12 months to August 2023, down from 0.7% in the year to July.
In fact, house price annual inflation has been generally slowing since July 2022, and Zoopla predicts house prices will fall further, averaging 2% in 2024.
Not good news for sellers, but nor does the current environment offer great opportunities for buyers. The Bank of England (BoE) reveals a depressed market: net mortgage approvals for house purchases fell to 43,300 in September — the lowest since January.
Bluestone Mortgages chief executive Steve Seal thinks it is of little surprise that mortgage approvals have sunk, as consumers continue to battle affordability challenges. However, he suggests that, with expectations of homebuyer and homeowner support in the upcoming Autumn Statement, hope could on the horizon.
Atom bank head of mortgages Richard Harrison also balances concern with cautious optimism, saying: “The most recent data from the BoE indicates a significant fall in purchasing activity, with continued month-on-month decline. Any further increases in interest rates will only place additional stress on an already depressed market.
I suspect it will be a pretty flat market next year. We will likely see around £210bn–£215bn in gross lending, so similar to this year
“Nevertheless, there is reason to be optimistic. Declining prices offer a chance for first-time buyers, with many experts believing the base rate has hit its highest point. While this is not expected to trigger an immediate, substantial surge in market activity or prices, it does diminish the likelihood of a more significant price decline.”
Perspective is everything. Maybe hopes of mortgage rates speeding back to the 1%–2% seen at the outset of the pandemic have been unequivocally dashed.
But it is just over a year ago that sterling fell to its lowest price against the dollar; gilt prices collapsed; the BoE and the government sang from different hymn sheets; and economists spoke of a ‘moron premium’ for Britain.
Thankfully we are not there now, and uncertainty is infinitely preferable to catastrophe.
This article featured in the November 2023 edition of MS.
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