Welcome news for homeowners as interest rates set to remain low

Housing market activity remained subdued during the second quarter due to a shortage of homes for sale, research showed today.

But transactions look set to pick up in the months ahead as interest rates remain low and wages continue to rise.

The number of properties changing hands was lower during the three months to the middle of June, compared with the same period of the previous year, according to the Bank of England.

The Bank attributed the weakness to an ongoing shortage of properties available to buy, with sales of new homes holding up better than those in the secondary market.

In its Agents’ Summary of Business Conditions report, it said estate agents had reported that the low supply was in part caused by a reluctance among homeowners to sell their property ahead of the General Election.

But it added that since the election, the London market had shown signs of stronger activity, particularly in the highest price bands, with estate agents expecting property prices in the capital to start rising again.

The housing market received a further boost today from news that interest rates look set to remain low, while wages are rising.

Minutes from the Bank’s Monetary Policy Committee showed that its members had voted unanimously to keep interest rates on hold at their record low of 0.5 per cent.

Although for two members the decision was “finely balanced” between a hold and a rise.
At the same time, figures from the Office for National Statistics showed a further acceleration in the rate at which wages are rising, with the headline growth rate increasing to 2.7 per cent in April, up from 2.3 per cent in March.

There was also a 114,000 rise in employment numbers during the three months to April, although this represented a slowdown compared with previous stronger gains.

Vicky Redwood, chief UK economist, said: “The minutes of June’s MPC meeting suggest that while the Committee is obviously starting to think about when a rate rise will be appropriate, it is still some way from actually implementing one.”

Meanwhile younger people have expressed concerns about their ability to get a mortgage term that will stretch into their old age.

Half of 25 to 34 year olds think they may still be repaying their home loan beyond the traditional retirement age of 65.

The Building Societies Association said with many people living for longer, delaying buying a property due to high house prices and working until later in life, mortgage terms that go beyond the age of 65 could become the ‘new normal’.

But a survey of 2,000 people carried out for the group found that 27 per cent of young people worried they would struggle to get a mortgage with a term beyond when they turned 65 because their credit history, income level or age would count against them.

Cost of five-year fixed rate mortgage drops to less than 3.5%

The average cost of a five-year fixed rate mortgage has fallen below the typical price paid for a two-year loan last year, figures showed today.

Intense competition in the mortgage market has driven down the price of a five-year fixed rate deal to an average of just 3.45 per cent.

At this level, the cost of a five-year loan is now significantly below the average interest rate of 3.37 per cent that was charged on a two-year fixed rate mortgage in May 2014.

The cost of the average five-year fixed rate mortgage has fallen significantly over the past year with many providers launching the lowest ever rates.

Longer-term fixed rates provide borrowers with extra security, and to be able to secure a five-year fixed deal at two-year prices is unheard of.

The figures came as minutes from the Bank of England’s Monetary Policy Committee meeting in May showed members had voted unanimously to keep interest rates on hold at their current record low of 0.5 per cent.

Economists are now predicting the first increase to the Bank Rate will not come until the first half of 2016.

The MPC also repeated its previous guidance that when rates did start to rise, they would do so more gradually than in previous cycles, while the Bank Rate was likely to remain below average historical levels for some time to come.

The key message is that the next move in interest rates will be up, but not for some time.

Market expectations were for rates to start rising in the middle of next year.

Confirmation that interest rates are likely to remain low for longer should help to boost activity levels in the housing market, as lower borrowing costs help property remain affordable despite rising prices.

In its Agents’ Summary of Business Conditions report, also released today, the Bank of England confirmed activity levels in the property market had remained below the levels seen last year.

It added that there had also been reports of a slowdown in the run up to the General Election, particularly among potential sellers, who were holding off putting their home on the market due to expectations conditions would be more buoyant in the second half of the year.

Their decision to wait had exacerbated existing supply shortages.

On a brighter note, it said the rental market had continued to expand, supported by a growth in buy-to-let activity.

But it added that so far, there had been no evidence to suggest the recent liberalisation to pension laws had led to increased investment in property.

Property commentators had previously expressed concerns that people would reinvest their pension pots in property, leading to a flood of homes being made available to rent, and pricing first-time buyers out of the market.

Number of homes for sale drops to lowest level in six years

House price growth accelerated in April as the number of homes being put on the market fell to a six-year low, research showed today.

A third of estate agents reported an increase in property values during the month, the highest level since the summer of last year, according to the Royal Institution of Chartered Surveyors.

The rise was driven by the ongoing shortage of homes for sale, with new instructions falling at their fastest rate since May 2009.

A balance of 21 per cent of estate agents reported a drop in new sellers, the eighth decline in the past nine months, with the shortage seen across the whole country.

Meanwhile, there was a slight increase in buyers, with a balance of 4 per cent of estate agents reporting a rise in new enquiries.

The mismatch between supply and demand pushed up house prices in all regions of the UK, the first time this has happened since August 2014.

There was a marked turnaround in London, where a balance of 28 per cent of estate agents reported price rises, compared with a balance of 6 per cent who recorded falls in March.

But across the UK as a whole only 16 per cent of estate agents expect house prices to rise in the next few months, although they are more confident that values will be higher in a year’s time at 72 per cent.

Meanwhile, in the rental sector demand from potential tenants showed no sign of slowing, leading to expectations of further rent rises.

RICS said while anecdotal evidence suggested some of the fall in homes being put up for sale and high tenant demand was due to uncertainty ahead of the General Election, it also reflected deeper underlying problems.

It pointed out that the downward trend in owner-occupation rates across the country was a visible sign that affordability constraints were continuing to bite, while household budgets were also being squeezed by higher rents.

It is conceivable that the decisive outcome to the election could encourage a pick-up in instructions to agents and ease some of the recent upward pressure on house prices, but it is doubtful that this will be substantive enough to provide anything more than temporary relief.

Alongside an increased flow of second hand stock, it is absolutely critical that the new government focuses on measures to boost the flow of new build.

The group called for a “coherent and coordinated” house building strategy to be put in place across all tenures.

It said this should include measures to kick-start the supply of new homes, including addressing planning restrictions, mapping brownfield sites and creating a housing observatory to assess the underlying economic and social drivers of housing and provide impetus for solutions.

Buy-to-let lending surges following pension rule changes

Mortgage advances to peop­­le buying a home dived by nearly 10 per cent in April but there was a steep jump in lending to investment landlords, figures showed today.

A total of £8.2bn was advanced for house purchase during the month, down from £8.9bn in April last year, according to the Council of Mortgage Lenders.

But the group said advances were broadly unchanged compared with March, and it expects lending levels to pick up coming forward.

Anecdotal evidence suggests many buyers and sellers adopted a ‘wait and see’ approach in the run up to the General Election, leading to lower activity levels in April.

Paul Smee, director general of the CML, said: “House purchase lending in April was relatively subdued compared to last year, but similar to activity in March.

“The economy is recovering, with employment up, earnings growing, and competitive mortgage rates, so we expect activity to continue building as the year progresses.”

But while advances to homeowners were subdued, buy-to-let lending surged by 22 per cent year-on-year, with a total of £1.1bn advanced to investment landlords.

April was the first month in which people were able to take advantage of new pension rules, enabling them to unlock their retirement savings in one go.

Commentators had previously predicted the change would lead to a surge in buy-to-let landlords, as people reinvested their pension pots in property.

There was also a steep jump in the number of investment landlords who were remortgaging in April, with a total of £1.4bn lent to those who were switching to a new deal - 40 per cent more than 12 months earlier.

Within the total for lending to people buying a home, advances to both first-time buyers and home movers fell by 8 per cent year-on-year, while the number of homeowners remortgaging dipped by 2 per cent.

But there was an increase in both the amount first-time buyers borrowed and the income multiples they were advanced during the month.

The typical person taking their first step on the property ladder borrowed £125,545, up from £120,000 in April last year, which represented 3.37 times their income.

Meanwhile, a combination of higher salaries and lower interest rates meant the proportion of their income they had to spend on mortgage interest each month dropped to 10.3 per cent, down from 11.6 per cent 12 months earlier.

The group said first-time buyers were now spending a lower level of their income servicing their mortgage than at any time since it first started tracking the measure in 2005.