The Governor of the Bank of England has said that he expects interest rates to fall gradually but has warned borrowers not to expect a return to the near- zero levels last seen four years ago, settling instead at a ‘’neutral rate’’. The textbook description of a neutral rate of interest is the level at which monetary policy is set for stable prices and is neither stimulating nor restricting economic growth.
As we end the first quarter of the year, it is clear the energy that first appeared in the local housing market at the beginning of the year has continued and in fact grown as we look at the number of new transactions that are currently being agreed between willing vendors and purchasers who have already sought advice on their borrowing capacity.
The Bank of England has now held Base Rate at 5.25% for the second consecutive month, which is a clear indication that the drastic increases over the past 15 months are at last having an impact on inflation. This should not be interpreted as meaning that the inflation threat has been conquered or that further increases can be ruled out.
In a recent review of the UK economy, the Bank of England held Base Rate at 5.25% following the announcement that inflation has fallen significantly. This is great news and a step in the right direction for mortgage borrowers, although it is unlikely that the effect will be felt until the economy stabilizes further.
For the 13th consecutive time, The Bank of England has increased Base Rate to 5%, with economists now suggesting that further rises to possibly 6.5% will be required in a desperate attempt to reduce UK inflation. It is forecast that these further increases could raise rates by 0.5% in August and September, slowing to 0.25% in November and December. These are still only forecasts, which suggest the worst scenario, although with the UK economy struggling to lower inflation and raise productivity, they should not be ignored.
Despite the announcement at the end of May that UK inflation had fallen, this was nowhere near enough to prevent the extreme concerns about the economy, with most commentators predicting that the Bank of England will have to continue to increase Base Rate to achieve the goal of greatly reduced inflation.
At its meeting on the 2nd of February, The Bank of England voted to increase Base Rate again by 0.5% to a new high of 4%. This is the tenth consecutive increase in just over one year, although subsequent increases predicted for later this year might be smaller, as inflation woes appear to have turned a corner. Despite the recent increases, we still find that many mortgage providers have not been raising their rates at the same pace as the Bank of England. The impact of the latest rate increase has yet to be seen, as lenders need to balance increased rates against the need to attract new business by offering competitive interest rates.
In an attempt to hold back the highest rate of inflation in decades, the Bank of England has introduced eight consecutive interest rate rises in the past eleven months, lifting the guideline Base Rate from 0.1% last December to 3% on the 3rd of November this year. This most recent increase in Base Rate, is unlikely to be the last, with forecasts suggesting that the rate will have to rise further next year, possibly up to 4.5%. Thankfully that peak is lower than predictions had suggested a few weeks ago, post the turmoil the Government’s mini budget caused.
Interest rates have thankfully remained constant for the last month, following the Bank of England’s Base Rate increase to 3% at the beginning of November when all Jersey mortgage providers adjusted their rates upwards, to match the 0.75% increase, which impacted heavily on the local market, as buyers and borrowers came to terms with the much higher cost of borrowing.
At its policy meeting on 4th August, the Bank of England increased Base Rate from 1.25% to 1.75%, endeavouring to restore balance between the demand and supply of goods and services. As inflation continues to creep even higher, it is predicted that Base Rate could well reach 3.3% by the end of 2023.
Estate Agents tell us that the local market is still very active, although it is suggested that house prices are no longer rising at the unprecedented levels that we had witnessed in the past eighteen months, with the average price of dwellings sold in the first quarter of this year sales being just 4% higher when compared with the last quarter of 2021.
A check on the property that was available for sale in Jersey at the beginning of May, shows that just under 500 houses and apartments were listed between 53 estate agents. These numbers do not include houses and apartments that are currently under construction in a number of locations, most of which are likely to have been presold off plan.
On 3rd February, the Bank of England announced a second rise in Base Rate to 0.50%. This came as no surprise as economists have been predicting that the Bank had no alternative but to introduce this increase, as a preventative response to inflation figures that showed prices rising at the fastest pace for more than 30 years.
At the end of October, four of Britain’s largest mortgage providers raised their UK mortgage rates in the wake of the Chancellor’s Budget, and in anticipation of the rumoured rise to Base Rate. At its meeting on 4th November however, the Bank of England decided that for the time being, Base Rate would be held at the current 0.10%. This decision came as a big surprise and resulted in a storm of criticism from many market commentators, who were already committed to an increase, although borrowers can breathe a sigh of relief, even if it is only temporary.
The Bank of England warns that post pandemic growth in the UK economy may be responsible for a sharp increase in inflation, taking it past the 2% target, which would normally trigger an increase in Base Rate. Forecasts, however, suggest that the surge will be short lived and that there would be no reason why an increase from the current record low of 0.10% should be considered. This is still worrying, as we can only assume that Base Rate will have to rise, if inflation does not fall as predicted.
At its monthly review of the economy, on 4th February, the Policy Committee of the Bank of England announced that it would start preparing for the introduction of negative interest rates within six months, although somewhat ambiguously it went on to stress that this was not a sign that it thought such a move was necessary.
The very high level of activity in the Jersey property market, attributable principally to the buoyant finance sector, has dampened somewhat. Not a bad thing, as it was starting to move too fast for comfort. No doubt the poor weather has had an impact, although the never-ending bad news about Covid-19, is probably equally responsible.
2020 has got off to a flying start, and it is likely that we will see a lot of change in the Jersey property and lending markets this year. House prices are on the rise, mortgage interest rates are falling, lenders are modifying their lending criteria and income multiples and the impact of Coronavirus, on the economy could result in the Bank of England having to review Base Rate downwards.
Nothing much is likely to happen to the Bank of England’s Base Rate until a decision is made about Brexit, although don’t be too surprised if it falls back to 0.50% before the end of the year.Nothing much is likely to happen to the Bank of England’s Base Rate until a decision is made about Brexit, although don’t be too surprised if it falls back to 0.50% before the end of the year.
The market is now predicting the Bank of England will raise its Base Rate to 0.75% later in 2018, possibly as soon as August after weak economic data and falling inflation caused delays in the anticipated interest rate rise in May. The Bank of England’s own forecast suggests that there will still be at least three interest rate rises between now and 2021, although it must be remembered that virtually every forecast in relation to Base Rate has been incorrect for the last 10 years!
Activity has picked up again since the half term break, although the Easter holidays are likely to divert the attention of many possible purchasers for a week on either side. This window offers a great opportunity for buyers to browse the market with less chance of being out-bid or gazumped. Everybody tells us that there is very little choice of available property, from one and two bedroom flats, up to two and three bedroom houses – a situation which is likely to continue until more property is placed on the market by existing owners.
Last month it looked as though lenders had decided to put a review of their mortgage interest rates on hold in the light of the predicted rise in base rate in May. This month, there have been five modest changes in our list of Best Rates, with two of the fixed rates increasing, whilst two fixed rates and a tracker have been reduced. This looks to be good news for borrowers as it suggests that the lending market remains stable for the time being as the UK struggles to find its feet on the new path that it has chosen towards Brexit.
There have been more changes in our Best Rates chart this month, with four product rates reducing and two increasing – in all cases the changes have been in the range of one to twenty basis points, which suggests that lenders are making adjustments to achieve a competitive edge rather than for any reason associated with Bank of England base rate rises.
All eyes have been focused on the Bank of England, its reaction to the Brexit vote and the possible shift in base rate, which has been pegged at 0.50% since April 2009. At the July 14th meeting of the MPC the Bank announced that base rate, for the time being anyway, would remain at 0.50%. Despite this decision, it is possible that the cost of borrowing will fall during the next few weeks and there will be much for borrowers to take advantage of.
The Jersey property market is steady, with little indication of price rises and with agents finally seeing properties going under offer that have been stagnant for the past twelve months. There appears to be a shortage of property in some categories, particularly the flats and houses that are mainly bought by First Time Buyers. Whilst this sector of the market has been much more active in the past eighteen months, First Time Buyers are now finding they have to compete with investors, some buying with funds from cash deposits that would otherwise be earning very little if left in the bank.
More reductions have been announced by Jersey lenders in the past few weeks, so making 2016 the year in which mortgage rates fell to the lowest that we have ever seen. As the year progresses, we should see a slightly more relaxed attitude being shown by lenders who for the past two year have been severely restricted by newly introduced regulations and this means that mortgages could soon become available to more borrowers than at present.
January is usually a busy month in the Jersey property market, as people return to work and start thinking of putting in place the plans they have discussed during the long Christmas break. Judging by our fully booked appointment diary since reopening in January, the footfall through the doors of The Mortgage Shop suggests we should be optimistic that 2016 is going to be very busy.
Mortgage lenders now have to follow a strict code of conduct, where affordability criteria governs how much can be advanced to borrowers. Whilst some lenders have found that they are restricted by the new rules, it is still possible to obtain mortgages that are roughly equivalent to gross income multiples that will range between four and a half times income up to somewhere in the region of six times.