Speaking at Mortgage Advice Bureau’s (MAB) annual conference at the ICC in Birmingham this week, O’Leary said that as interest rates typically track with the economy so if economic growth in real terms is between one to 1.5 per cent, and inflation could possibly reach three per cent, then interest rates may reach four to five per cent.
“I think that is too aggressive, but I don’t think we can rule it out,” he said.
He added that over the next 12 months he expected the interest rate to be one per cent higher than it is today in terms of base rate.
O’Leary said that he expected an increase in rates in November, December, March and then possibly in August.
“The Bank of England will be slow about putting them up, they will make a move and see what happens to the economy, and then they’ll potentially move again in my view,” he said.
He said that inflation over the next couple of months would reach four per cent, and he said that there still some uncertainty about how long-term this trend would be.
“We haven’t seen that in a decade and only seen it a couple of times in the last few decades previously. How much of this is transitory and how much of it is permanent is still an open question,” O’Leary said.
He said at the start of the year central bankers and economists were leaning towards it being more transitory as it was a “strange recovery” and they were “temporary issues that will work themselves out”. However, now he said that the evidence suggest that the issue is “more persistent”.
He added: “I think inflation is going to be here to stay and I think we will reach four per cent or so over the next number of months that will drive down on incomes.”
O’Leary said that potential headwinds might also come from Brexit, which we haven’t seen “full effects of yet” as some import checks have been delayed to July, and the unwinding of government support.
O’Leary added that the labour market had also shown a V-shaped recovery and whilst there was still a lot of uncertainty around the ending of furlough, wider evidence suggested the UK was in “pretty good shape”.
He said that the number of employees had reached pre-pandemic levels. He added that the number of vacancies in the UK was currently 1.1m, and those on furlough when it ended was around 1.3m, and whilst it would not be a one to one it did show a strong labour market.
Strong housing market
Although there are some notable headwinds for the economy he said that positives that it had been an “extraordinary period” for the housing markets as rent prices, house prices and mortgage approvals all rose.
O’Leary said that over the last decade average mortgage approvals were around 60,000 to 70,000 but after the initial lull during the pandemic it spiked to over 100,000.
He said that a driver of this was people wanting more space, which he said was a “structural change” for the market, and banks continuing to lend.
O’Leary explained: “Banks have been able to pass on the very low rates to consumers. That has meant that even though house prices have gone up by 10 per cent per annum over the last 12 to 18 months we see a situation here where the serviceability and the sustainability of that debt has actually improved.”
He pointed to the loan payment relative to income, which he said was at an all-time high, whereas mortgage payments relative to income were at all time lows.
Affordability will tighten as rates rise
“The era of low interest rates has opened up a new cohort of buyers in the UK housing market at affordable levels, but that’s going to be a bit more difficult over the next 12 months. It won’t tear it off completely, but you should be aware of it,” he said.
However, he said that the low levels of stock would fuel house price growth over the next 12 months by around four to five per cent.
He added that banks were on the “look out for business” so “credit eligibility” would be quite open over the next 12 months.
O’Leary also noted that there was a cumulative £145bn in excess savings in UK households over the last 18 months, mostly from affluent households in the top 20 per cent of income distribution.
He said that some of this could be partly used to help younger dependents with housing deposits, which would also fuel the housing market.
He added that the UK government was “very supportive” of UK homeownership it would take proactive action to strengthen the market. He pointed to Help to Buy, which is due to expire in 2023, and said that if the government saw the market as weak it could be “extended in some form or fashion”.