- MPC Statement should stem the increase in fixed rate mortgage pricing
Ray Boulger of leading independent mortgage adviser John Charcol comments on the mortgage and housing markets and the first MPC meeting under Mark Carney’s stewardship, which resulted in, as widely expected, no change in either Bank Rate or the amount of Quantitative Easing (QE).
“Most post meeting announcements from the MPC during Mervyn King’s term of office were limited to stating whether there was a change in Bank Rate and/or, in the later years, the QE programme. The rather more enlightening statement issued today following the first meeting chaired by Mark Carney suggests that in future we will be given more titbits on the committee’s thinking immediately after the meeting rather than having to wait 13 days for the minutes.
“One result of this is likely to be more reaction from markets, especially the gilt market, on MPC meeting days, with today providing a prime example following price sensitive comments in the Bank’s statement.
“After Mervyn King’s comments last week that markets had overreacted to Ben Bernanke’s suggestion that the Fed might slowdown its QE programme quicker than generally expected the MPC was clearly keen to reinforce this message by virtue of the following comment after reaffirming that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. “The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.”
“Following this comment gilts and equities have reacted very positively, whereas sterling has fallen. At the time of writing the 5 year gilt yield has fallen 6 basis points on the day to 1.35%, but is still 24 b.p. higher than a month ago. This will take some pressure off swap rates and should stem the recent upward movement in fixed rate mortgage pricing. However, now that it is plain for all to see how rapidly gilt pricing can change when the mood changes yields are unlikely to fall back to previous lows.
“The MPC statement also commented on the Chancellor’s request that next month it considers the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. With Mark Carney’s track record this has all the impression of being a done deal and so either the statement following next month’s MPC meeting and/or the inflation report is likely to provide the markets with plenty of food for thought.
“The Nationwide house price index has increased by 4.1% in the first half of this year and the Halifax index by 5.1% (based on actual prices, not the manipulated seasonally adjusted figures). Nationwide reported lower prices in four of the last six months of 2012 and only a small rise in the other two months. Halifax reported prices falling in three of the last six months and both lenders reported an overall fall in the second half of last year. Therefore, even if house prices flatline over the next six months the year the year on year figures reported by both lenders, currently 1.9% for Nationwide and 3.7% by Halifax, will steadily increase over the rest of the year as last year’s weaker figures progressively come out of the calculation.
“Looking at Nationwide’s regional index only 3 of its 13 regions showed a price fall in Q2 2013, with East Anglia and Scotland both outperforming London. Furthermore over the last year only 3 of its 13 regions recorded a fall. This suggests that the gap in house price performance between London and the rest of the UK is narrowing.
“After about 2½ years of broadly flatlining, the increase in house prices over the last six months looks set to continue for at least a couple of years. In most parts of the UK activity in the housing market is more likely to be constrained by lack of stock than by lack of buyers. As the upward price trend continues, combined with low mortgage rates and improving availability at higher LTVs, anyone who has been holding off buying a property waiting for house prices and/or mortgage rates to fall further is likely to take the view that they are more likely to lose out by waiting than by acting. Demand for housing can increase or decline quite rapidly when the mood changes but there is a long time lag before supply can be increased.
“As a result of the above analysis I have upped my original forecast for 2013 of a 2% increase in house prices to a minimum of 6%, but a more likely 8%, with a further rise next year. This calls into question not only the need but also the desirability of the second stage of Help to Buy, the mortgage insurance scheme due to launch in January next year. Funding for Lending and the existing Help to Buy new build shared equity scheme are both providing very welcome props for the market but the Government should reconsider the rationale for the mortgage insurance scheme. The only real reason for this scheme is the onerous capital adequacy requirements for 95% LTV lending.
“The scheme was announced in the budget without proper forethought and more than three months later the only detail which has been announced was this month’s news that UK Asset Resolution will manage the scheme. The Government is struggling to cobble the scheme together and The Chancellor should recognise that the market has moved on considerably since it was announced, in no small part due to the success of his shared equity scheme and Funding for Lending, and announce that changes in the market since the budget mean that the mortgage insurance scheme is no longer needed.
What Should Borrowers Do?
“Fixed rate mortgage pricing is unlikely to fall below the levels reached last month but the recent upward trend from several lenders should be nipped in the bud after today’s fall in gilt yields and swap rates, as this appears to be based on a fundamental reassessment of the interest rate outlook following today’s MPC statement. Funding continues to be readily available to most lenders, with few, if any, likely to take up their maximum potential available under the Funding for Lending scheme.
“In most cases fixed rate mortgages are cheaper than comparable tracker rates at the same LTV, although Abbey is tomorrow launching a term tracker up to 75% LTV at Bank Rate + 2.19% with a low fee of £495 and no early repayment charges (ERCs). This will be attractive to some borrowers, especially those wanting the flexibility of having no ERCs.
“With most SVRs in the 4% to 6% range this new term tracker will allow borrowers with at least 25% equity who don’t want to fix, perhaps because of ERCs, to remortgage to a much cheaper rate whilst still retaining the flexibility to redeem the mortgage without any ERCs. Alternatively 5 year fixed rates up to 75% LTV start below 3% and offer excellent value combined with medium term security.
Borrowers should contact John Charcol on 0800 71 81 91 or visit www.charcol.co.uk
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