It is getting cheaper to borrow. You may not have noticed that yet, and the Bank of England has merely stopped increasing rates, rather than cutting them. But the financial markets are cutting the cost of money (they are, so to speak, doing the job of the central banks for them), which will make life easier for all borrowers, especially home-buyers.
To see what is happening, take one measure: the interest rate on 10-year gilts. That is what the Government has to pay to borrow for 10 years. Three weeks ago, the rate was nearly 4.7 per cent and a week ago it was 4.5 per cent. On Tuesday, it was below 4.3 per cent. Five-year yields have also fallen, and are now 4.1 per cent, well below the Bank of England’s current base rate of 5.25 per cent. The message from the markets is clear: they expect the Bank to cut the cost of borrowing pretty sharply in the months ahead.
Cheaper money will inevitably affect house prices. The latest data from Nationwide, the largest building society, showed that prices rose by 0.9 per cent in October, though they were still down 3.3 per cent on a year earlier. Halifax also reported an increase in prices in October of 1.1 per cent, though, like Nationwide, it reported that prices were still down year-on-year.
This may be a false dawn, for transactions are very low, with would-be sellers holding off putting their homes on to the market. So there may be further falls this year. But looking to 2024, it must now be an odds-on bet that by the spring, prices will have stopped falling and will mark the start of a decent recovery.
That is the view of a number of private-sector economists. For example, Pantheon Macroeconomics think that there will be “a material recovery” in house prices next year, with the low point coming in the first quarter of the year, and prices then rising by 5 per cent by the end of 2024. They also predict that the Bank will start to cut base rates in May, and get them down to 4.5 per cent by the end of the year. Last August, City economists polled by Reuters thought the peak in base rates was likely to be 5.5 per cent, with a strong chance of it being 5.75 per cent. Now, that looks far too gloomy. The markets are signalling the corner has been turned.
The speed at which interest rates fall is largely determined by the speed at which inflation falls. There have been so many disappointments on this front and so many missed forecasts by the Bank of England, that the idea that inflation might actually fall faster than expected seems to many people pie-in-the-sky. But just as the peak in interest rates looks like being lower than expected even a few weeks ago, it is plausible that inflation will start soon to look much better.
One particular reason is how the energy price cap works, for it is revised every three months, and therefore tends to lag what is happening in the wholesale market for energy. The Bank of England is cautious, as it jolly well should be given past failures, but taking the sober view of the Institute for Fiscal Studies as a guide, the CPI should fall to a little above 4 per cent by the end of this year and a little below the 2 per cent target in the second quarter of 2024.
Think about that. If inflation is below target next spring, it will be very hard to justify holding interest rates at anything like current levels. So what might all this mean in the longer term? Three points. The first is that a market with house prices slowly climbing will feel quite different from the rather frantic mood of the last housing boom and the current caution. The cost of financing a purchase, or refinancing one, will come down a bit but will still be much higher than it has been in most home-buyers’ experience.
We are back to the situation of the early 2000s, not the long period of very cheap money between 2009 and 2021. So it won’t be a buy-now-while-stocks-last mood. Transactions will pick up only slowly. It should feel healthier: people buying the homes they need, rather than trying to make a quick profit or pick up cheap from a distressed buyer.
Second, a solid housing market will support the economy more generally. The so-called “wealth effect”, where the fact that a person’s or family’s assets are rising in value gives them the confidence to carry on spending. Consumption is the largest chunk of the economy, accounting for some 60 per cent of GDP. So, no recession next year, just slowish growth.
And third, thanks to the recent rise in incomes and this pause in the housing market, homes will have become a little more affordable. The ratio between average earnings and house prices remains very high by recent historical standards. But it will be more like the levels of the early 2000s than the peak of a year ago when they were around nine times average earnings. Life will remain tough for first-time buyers, but my hope is that more people who want to own their own home will be able to do so.
This issue, where young people even in well-paying jobs, cannot afford to buy their own homes, is profoundly worrying. Not everyone wants to own their home, but for those who do there should be a reasonable pathway to that goal. The social argument is that home-ownership is one of the two main pathways to building wealth, the other being a pension entitlement or fund.
Having a cushion of wealth may become more important in the decades ahead, as the capacity of the state – not just in Britain but across the developed world – to help support social welfare may decline. While wealth is uneven in the UK, it is thanks in part to home-ownership that median household wealth is just over £300,000. Wealth, for obvious reasons, increases with age, and for the median household where the reference person (the ONS doesn’t want to call them the head of household) is between 55 and state retirement age, wealth is over £550,000.
There is no right or wrong level for home ownership. Within Europe, Romania has the highest level with 95 per cent of homes owned by the people living in them, and Switzerland the lowest at 42 per cent. But that does not mean Romania is especially favoured and Switzerland the reverse. Actually, Romania is one of Europe’s poorest countries and Switzerland the richest. The UK is middle of the pack, with 65 per cent of homes owner-occupied in 2019, up from 63 per cent in 2017 but down from a peak of 73 per cent in 2006. We are in much the same position as the US, which also has about 65 per cent of homes owner-occupied despite quite different density of population and availability of land.
Intuitively, I expect owner-occupation in the UK to recover, though maybe not to that peak in 2006, largely because people want to own their homes. There will be great social and financial pressure to find ways of helping them to do so, and I cannot see somewhat higher interest rates as a significant barrier. After all, the slump in owner-occupation that took place between 2006 and 2017 was, for the most part, a period of low interest rates. The problem was not the cost of money but its availability. Mortgages were cheap but you couldn’t get them.
However, the increase in owner-occupation will be slow and will be influenced by many other things, notably the availability of an alternative. For example, the squeeze on private rentals may push people into buying earlier than they had planned. Supply will remain tight, whatever the impact of changes in planning regulations. And immigration/population growth will support demand.
So the housing issues will remain tense for all sorts of reasons. But let’s be relieved about one thing. This sudden surge in interest rates over the past couple of years has depressed the market, but it has not caused a crash. Phew!
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