Inflation Concerns Spark Interest Rate Hike Speculations, Impacting Housing Market

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Inflation Concerns Spark Interest Rate Hike Speculations, Impacting Housing Market


Inflation Concerns Spark Interest Rate Hike Speculations, Impacting Housing Market. Amidst mounting inflation concerns, the UK's housing market experienced a notable uptick in mortgage approvals, providing a glimmer of hope after months of volatile interest rate fluctuations. The Bank of England's latest data revealed an increase in net approved mortgages for home purchases in June, rising from 51,100 in May to 54,700. However, experts remain cautious, suggesting that the true impact of recent mortgage rate hikes may not be fully evident until September's data is released at the end of October. As expectations for interest rates and mortgage rates temporarily paused their ascent due to the latest UK inflation figures falling below market expectations, the question of whether rates will decline significantly remains uncertain, prompting potential buyers and sellers to adjust their expectations in the ever-evolving market landscape. Additionally, amidst growing concerns over inflationary pressures, there are speculations of a possible interest rate hike, with both borrowers and lenders carefully watching the Bank of England's upcoming decision, which could have significant implications for the housing market's future trajectory. 

If you missed the latest Merryn Talks Money podcast, listen in now – Merryn and I answer your questions with the help of Bloomberg columnist Marcus Ashworth (who strongly disagrees with the Bank of England), Joe Easton (passive or active?), and Eddie Spence (Bitcoin or gold — or something else?). Follow along here. 

The housing market saw a slight uptick in June, according to the latest data from the Bank of England on mortgage loans. The net number of approved mortgages for home purchases increased from 51,100 in May to 54,700 in June. As you can see in the chart below, it's still far below pre-pandemic levels, but it's certainly an important rebound after the volatile interest rate shocks of recent months. 

However, I'm not entirely convinced that everything is clear for the housing market just yet. As Andrew Wishart from Capital Economics pointed out, this doesn't fully reflect the pain from the recent mortgage rate increases. 

The Bank of England's figures confirm this. The average interest rate paid on new mortgages increased slightly to 4.63%, up from 4.56% in May. It's still a bit below the rates displayed in the "best-buy" tables at the moment. 

According to Wishart, the impact of the recent rate hikes won't be revealed until we get the data for September at the end of October. Overall, he believes that approvals will truly "revisit the low point of 40,000 per month seen earlier this year." 

That seems reasonable to me, though it's a strong call - much depends on the momentum in the market and the trajectory of mortgage rates from here on. We had some good news for anxious borrowers as the latest UK inflation figures fell below market expectations for the first time in months. 

Consequently, expectations for interest rates and mortgage rates have halted their ascent, at least for now. Whether they will decline significantly from here is another question. 

As my fellow Bloomberg Economics colleague, Niraj Shah, mentioned, "While some lenders have already started cutting mortgage rates, we suspect many are holding back to ensure the Bank of England doesn't raise by more than 25 basis points" when announcing its latest decision on Thursday. 

That's not given by any means - I reckon the Bank will go with the 25 basis points, but the market is still considering a half-point hike. We'll see. Either way, I wouldn't count on interest rates falling too sharply, even after the Bank reaches the peak for this cycle (which isn't likely to be far off).

This might just mean that homebuyers and sellers need to adjust their expectations from time to time and meet somewhere in the middle, implying modest nominal house price declines and larger "real terms" decreases. At least, that would be the least damaging outcome. 

However, we'll get more housing price data tomorrow with Nationwide's latest release. But before we go, a final and separate point arising from another section of the Bank's Money and Credit figures - that is, the latest savings data.

Laura Suter, the head of personal finance at AJ Bell investment platform, pointed out that a staggering £270 billion is now sitting in accounts that pay no interest at all. That's quite remarkable and earning nothing.

If your money is sitting in those lazy money stacks, then I have just one message for you - for heaven's sake, get your finger out and move it to somewhere that at least gives you a bit of interest.

Today's chart... Pump prices firm up 

The markets are getting all excited about peak inflation. So, as is my wont, I thought I'd just add a bit more summer rain to your already damp Monday. All economic activity gets turned into energy. So if energy is expensive, it raises the cost of all other economic activities. Using oil prices as a proxy for the overall cost of energy makes sense to me, and if you look at the five-year chart below, you can see that oil prices definitely have a significant impact on inflation. 

The white line is the spot price of crude oil, measured by Brent. The blue line is the UK's annual inflation rate, measured by the CPI (Consumer Price Index). You can see very clearly that the blue line broadly tracks the white line, with a (very) rough lag of perhaps six to eight months. As you may also notice, the white line seems to have bottomed out and is now bouncing back. My informal personal inflation indicator - the prices at BP petrol pumps on the high street - confirms this. I've noticed that it has stopped falling recently and even rose a bit over the weekend (by precisely one cent per liter of petrol). 

I'm not sounding the alarm here, just sounding a warning note that some of the more favorable base effects we've enjoyed recently won't last much longer if oil decides to park itself around this level or even go higher. In any case, it's one to keep an eye on.

Conclusion and Response 

Inflation Concerns Spark Interest Rate Hike Speculations, Impacting Housing Market

In conclusion, the recent uptick in mortgage approvals amid inflation concerns and interest rate speculations indicates a somewhat resilient housing market. While uncertainties remain, the market has shown signs of adaptability and recovery. As we await further data and decisions from the Bank of England, it's crucial for potential homebuyers and sellers to remain vigilant and flexible in their expectations. Consider seeking professional advice to navigate through any potential changes in interest rates and market conditions. Moreover, it's essential for borrowers to explore competitive mortgage options and take advantage of current lower rates while they last. Positive responses from borrowers and lenders alike in adjusting to inflationary pressures and potential rate hikes can foster a sense of stability and confidence in the housing market. By staying informed, proactive, and prepared, both buyers and sellers can make well-informed decisions that contribute to the market's continued resilience and growth, regardless of the challenges it may face.


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