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The impact of China’s turbulent stock markets on UK mortgages

  • 27/08/2015
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The impact of China’s turbulent stock markets on UK mortgages
The global impact of turbulence within China's stock market over recent weeks could delay the beginning of a Bank Base Rate rise, potentially bringing UK mortgage rates back down to rock-bottom levels, writes Hannah Uttley.

China’s stock markets were in turmoil this week after a rapid growth in share prices which soared 150% in the year to mid-July, culminating in a bubble that eventually had to burst.

A share buying frenzy led to fears that the market was unsustainable prompting a rush of selling among nervous investors causing share prices to tumble and Chinese companies to suspend share dealings.

The Chinese government has tried, and ultimately failed so far, on numerous occasions to prop share prices up by devaluing its currency and slashing the country’s interest rate, leading to sense of panic not only in China, but in economies across Europe, the UK and in America.

The growing sentiment back home in the UK is that what appeared to be an eagerly anticipated interest rate rise announcement from the Bank of England, is now likely to be pushed back by months.

However, any impact on the UK interest rate is likely to be a result of China’s influence on the wider economy and commodity prices rather than a direct hit to the UK economy, as Peter Westaway, head of investment strategy group and chief economist, Europe, at Vanguard Asset Management explains.

“I think there are increasing signs that the Chinese growth story is going to slow down, it’s almost certain that we’re moving away from the world where Chinese growth was up above 10% a couple of years ago.

“As soon as that expectation starts to sink in, commodity prices and oil prices around the world start to respond. Weaker commodity prices then have a knock-on effect to emerging markets, so it’s really those wider ramifications that in the end are going to make the global growth outlook feel a bit softer,” Westaway adds.

MPC vote

The Bank of England’s Monetary Policy Committee (MPC) voted this month to once again keep interest rates at 0.5%, despite hints from MPC member Martin Weale in June that rates could rise as early as August. However, when the vote was carried out earlier this month, one member, Ian McCafferty, moved to vote against the proposal to maintain the current rate, advising an increase of 25 basis points.

Economists agree that Carney’s prediction that a rate rise will occur ‘around the turn of the year’ is looking less likely, but pointed out that low oil prices are only likely to have a temporary downward influence on inflation.

“The drop in oil prices makes it more likely that the UK enters deflation over the next few months and the rate remains far below the MPC’s target of 2% over the next year,” says Samuel Tombs, senior economist at research firm Capital Economics.

“Any decisions that the MPC makes on interest rates take quite a long time to affect the economy and fundamentally the UK’s economy looks pretty sound, wage growth is picking up so it’s likely to conclude that these are just temporary inferences on inflation,” he adds.

A number of mortgage lenders have moved to increase product rates in recent weeks, with Nationwide, TSB and Halifax all upping rates on mortgage deals. Announcing increases on some of its products, Halifax said it had made the changes in response to market conditions and funding costs, while TSB said the increases brought it in line with recent moves across the market.

The Council of Mortgage Lenders’ Sue Anderson pointed out in a blog post last month, interest rate swaps act as an indicator for lenders to help protect themselves against the risk of an unexpected interest rate rise and ensure they deliver a consistent return on products.

Martin Ellis, housing economist at Halifax, says lenders will be keeping a close eye on swap rates, which offer a good indication of how interest rates are likely to change over a projected period.

“It’s a new development so it will be watched closely to see how the markets react and how that feeds through to swap rates, which could affect any of our pricing decisions. There’s not likely to be any knee-jerk reactions in light of what’s happened over the past few days,” he says.

Lower mortgage rates

Capital Economics’ Tombs says there is scope for lenders to reverse their stance and further reduce already low mortgage rates as the impact of turbulence in China’s stock market feeds through to the wider economy.

“What will certainly impact on how banks price their mortgage products is that we’ve seen interest rates in the market fall quite sharply in the last few weeks. Swap rates have fallen fairly sharply of late so most mortgage providers will probably pass those savings on to consumers over the next couple of months,” he explains.

Vanguard’s Westaway believes mortgage rates will move broadly in line with any changes in the Bank of England’s base rate.

“Maybe banks will start trying to restore margins a little bit as rates go up, but I think that’s a second order effect compared to the broad movement in rates,” he says. “Whenever the MPC decides to raise rates, I would predict that two years after that it’s very unlikely that the policy rate will have gone up much more than 2.5 to 3% at the absolute most.”

Westaway continues: “If you look at the long-term mortgage rates out there I think they’re already reflecting that expectation that we’re in a newer regime compared to the pre-recession era. The financial crisis has left a big legacy of balance sheets that need to be repaired – we’re not going to get back to the rip-roaring growth that we saw in the earlier 2000s.

“From a mortgage perspective, that’s good news for borrowers.”

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