Speaking at the Mortgage Advice Bureau conference, David Fenton (pictured), chief economist at TSB, said that he thought that interest rates had reached a peak of 5.25 per cent due to several factors.
He pointed to net lending in the first nine months of the year cumulatively coming to a little over £2bn.
This compares to £50bn in the same period last year and £60bn in 2021, and that the net lending figure for 2023 was weaker than the period in 2009 to 2011 just after the global financial crisis.
“The interest rate shock that we’ve seen over the past year and a half is the equal of those forceful headwinds [post-global financial crisis]. In fact, as you can see from the figures, it’s actually got the beating of them.
“That’s how profound an impact higher interest rates are having on the mortgage market,” Fenton explained.
Mortgage market in 2024 likely to be ‘frozen’
Fenton noted that the mortgage market for next year would most likely be “frozen” at least as far as net lending was concerned.
He continued that for the market to “thaw” for first-time buyers especially was around earnings, interest rates and the amount of money that first-time buyers can borrow.
Regarding earnings he said that that growth in this area was the “silver bullet” and “pain free way for the market to adjust” to boost affordability but there was a “speed limit” on how much growth can be seen in this segment.
He explained that runaway earnings growth could force the Bank of England to increase interest rates further to combat inflation.
Base rate direction
The second strand to the market “adjustment” is interest rates, with expectations from the market indicating that the base rate would likely fall in the second half of 2024.
“The Bank of England won’t be in any great hurry to reduce rates and then even when it does, they’re only going to fall so far,” he added.
Fenton said that markets had the base rate levelling off at around four per cent, which is “still pretty high”, and would influence swap rates which consequently impact mortgage pricing.
For example, the five-year swap is around 4.25 per cent and forward rates imply that will fall to 3.9 per cent in five years’ time, equal to a decline of less than 10 basis points a year.
On the borrowing side, he said that the only “realistic” way of increasing the amount that first-time buyers can borrow is if house prices fall.
Fenton said that house prices have “stabilised but they haven’t declined”, pointing to the fact that house price had increased by 25 per cent during the pandemic.
“It’s really just a pause for breath, no more than that,” he added.
Treasury forecasts indicated that there will be a peak to trough decline of six per cent, which Fenton said sounded like a “remarkably soft landing”.
Factors in this soft landing include property transactions holding up, partially fuelled by resilient cash buyers, the high inflationary environment and lack of supply.
He noted that unemployment rate forecasts imply that this could go up to 4.75 to five per cent and while this was a “noticeable increase” it was “not big enough to trigger a wave of forced sellers”.
Stress testing and the upcoming election next year possibly bringing in new policies could also factor into the house price forecast.
Small house price fall ‘double-edged sword’
Fenton said that the softer fall in house prices is a “double-edge sword” as more of the “adjustment” to the property market will then need to fall on to earnings and interest rates, which doesn’t look likely.
“What that says to me is that this adjustment is going to be reasonably slow. But just as 2023 has been a challenging year for the mortgage market, it 2024 is going to be a challenging year as well,” Fenton added.
However, he said that while both remortgaging and purchase markets had decline they had not disappeared and there is “still all to play for in 2024”.
“Will the market be competitive? Yes. Will the market be subdued? Probably. Will borrowers need the expertise and understanding from trusted advisors like you? Absolutely,” Fenton concluded.
