60 Second Property Digest – UK mortgage affordability squeezed
Flora Harley analyses what the latest rate hikes mean for mortgage affordability as household budgets are tightened.
2 minutes to read
It is clear that central banks are committed to bringing down inflation even if that pushes economic activity down – that was the decisive message from their annual meeting at Jackson Hole in August.
That commitment has been made abundantly clear with increasingly large rate hikes being implemented. In the past few weeks, among many others, the Federal Reserve, European Central Bank (ECB)and Swiss National Bank all raised by 75bps, taking their rates to 3.25%, 1.25% and 0.5% respectively. The Bank of England opted for 50bps bringing their base rate to 2.25%.
These latest moves leave Japan as the only central bank to still have negative rates. Due to pressures on the yen, The Bank of Japan intervened in exchange markets last week, the currency is more than 22% down against the dollar in the past year. Chinese mainland and Turkey are the only ones bucking the trend with rate cuts in 2022.
In anticipation of the latest move, in mid-September mortgage rates in the US breached the 6% psychological threshold, the first time since 2008. One analyst at bankrate.com noted that the increase since the beginning of the year has the same impact on affordability as a 28% increase in home prices. Added to which, according to S&P Case Shiller average house prices have climbed 10% in the first six months.
In the UK since the start of the year, when factoring in price growth and interest rate changes, by the end of August the average mortgage payment will have risen around 34% or £260. This brings the proportion of income spent on mortgages to 39%, a level not seen since 2008 but still well below the 50% seen in 2007. With mortgage offers in place for a number of months this will likely have a lagged effect.
However, this is met with a stronger sense of job security, with unemployment at a multidecade low of 3.6%, more buoyant household balance sheets and the ability of existing homeowners to port mortgages if they locked in a lower rate previously. In addition, the government’s energy cap of £2,500 and additional fiscal easing announced on 23rd September, such as the reversal of National Insurance contributions rise and income tax lower rate reduction from April 2023, may further relieve household budgets.
With affordability of mortgage payments becoming more strained, we expect the housing market to cool from here – the final direction will be dictated by movement in the base rate.
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