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Mortgage rates to hit 4% within five years – Savills

  • 02/11/2017
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Mortgage rates to hit 4% within five years – Savills
Savills expects baseline mortgage interest rates to reach 4% by 2022 with the number of housing transactions to remain around the new normal of 1.1 to 1.2 million in the next five years.

In its annual five-year prediction, the property company said it expected average house price growth of just 1% in 2018 with the Bank of England Base Rate to be around 0.5% next year.

Savills expected Help to Buy to continue but in a reformed state post-2021, however it added that next year would test the government’s appetite for delivering the right number of homes in the right place.

Although Brexit is having a chilling effect on the housing market by making buyers more cautious there were positive moves identified in the growth of small builders.

Last week Savills research analyst Lawrence Bowles said a house price crash was not on the cards, but hinted at its expectations for the next five years, with a split between London and the South East, and the North.

This was confirmed by Savills’ forecast as over the next five years it expects average national house price growth of 14%, with the North West (18.1%), North East (17.6%), and Yorkshire and Humberside (17.6%) seeing the strongest rises.

In contrast, it predicts mainstream London house prices to rise just 7.1% and suggested that next year these could even fall by as much as 2%.


Interest rate constraints

Savills noted that there were a range of constraints driving the market and these trends were set to continue for several years.

It believes a slow and steady rise in interest rates and the stress testing regime will put a squeeze on borrowing, particularly for first-time buyers and high-priced markets such as London.

Speaking at the publication of the forecast, Savills head of residential research Lucien Cook (pictured) said whether or not rates rose today, the business expected the base rate to rise consistently.

“We do expect them to hit around 2.25% by 2022 with mortgage interest rates to rise to 4% by that time,” he said.

“That’s a high enough rate that it will reduce the accessibility of mortgage finance for new buyers so that will put a damper on the broking transaction levels. But at the same time it’s not a fast enough growth in interest rates that we are likely to see any forced selling.

“Since the introduction of the Mortgage Market Review (MMR) in 2014, mortgage holders are a lot better stretched and the whole system is a lot more secure so there won’t be pressure on people to sell, but it will be harder to buy.”


BTL falls

Savills expects a fairly sharp decline in the number of transactions involving mortgage buy-to-let (BTL) properties over the next five years as the stamp duty surcharge, cut to interest rate reliefs and other regulations take hold.

It noted there were around 75,000 transactions over the last year, down from 183,000 in 2007, and expected this to fall to around 55,000 in 2022.

“With the additional mortgage affordability stress tests on BTL landlords, mortgage interest tax relief being removed and the additional 3% surcharge on Stamp Duty we think those falls will continue and we are expecting the number of mortgage BTL transactions to fall to just 55,000 by 2022,” Cook continued.

He added: “The one that could increase pressure is the lack of interest rate relief. As that relief falls you have a ratcheting on BTL investors, which makes it much more difficult when you have a substantial level of gearing to make that portfolio break even on a cash basis. So we are pretty confident that mortgaged BTL will see further pressure.”


Brexit impact

Savills highlighted that Brexit was continuing to have a chilling effect on the housing market by making buyers cautious in the short term.

As a result, it has delayed its forecast bounce in house prices until 2020 when the UK should be feeling more positive due to an expected Brexit transition deal.

“Uncertainty over what Brexit means for the UK economy and how it will impact household finances will increasingly act as a drag on house prices,” Cook said.

“There is capacity for growth once we have greater clarity, but this will be constrained by rate rises and the corresponding ability to get mortgage debt, particularly in London and other higher value locations.”


Small builders boost

Savills also highlighted that housing policy needed to be addressed with not enough houses of the right type being built in the right places.

It suspected that Help to Buy would remain unchanged until 2021 but anticipated it being reformed, but not withdrawn, post-2021.

“We assume Help to Buy will continue in some form post-2021,” Cook continued.

“We think it would be hard for government to ask house builders to go cold turkey but will need to be reformed.”

And it noted that while many large house builders may be working at close to capacity, smaller house builders were starting to grow and had bought 88% more plots this year.


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