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Interest rates unlikely to rise before 2014

The fiscal tightening implemented by the new coalition should not choke off the recovery, but it will slow UK economic growth over the next two years, according to the latest Ernst & Young ITEM Club forecast,.

The Chancellor's five-year plan to cut the deficit while keeping the pace of the economic recovery is very ambitious. But ITEM Club believes that in the long term it will lead to more sustainable high-quality growth from 2013 because it will be led by business investment and exports, rather than public spending.

Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club comments:

“The new coalition's plans to cut the deficit are certainly ambitious. But the bulk of the additional tightening is set to come in the second half of the parliamentary term, when we believe that the recovery will be firmly entrenched and the economy should be able to deal with the headwinds from the Budget.

"On the assumption that the government is able to implement the overall reduction of £40 billion set out in the budget, we expect that UK growth will struggle to reach 1% this year but will gradually speed up in the following years to give the UK a high-quality recovery based on trade and investment.”

Tax increases v spending cuts

As suggested by the coalition a combination of tax increases and spending cuts is necessary to cut the deficit. Past evidence suggests that fiscal corrections that are focused on spending cuts are more likely to lead to successful debt reduction with limited impact on growth.

However, with the deficit being so large the government had no choice but to raise taxes, the centrepiece being the increase in the standard rate of VAT to 20% on 4 January 2011. Spencer says that the VAT rise will help to plug the fiscal black hole over the following 12 months.

But he cautions that after that the medium-term forecast for the UK economy is fraught with uncertainty. “The medium-term outlook for growth, inflation and interest rates is critically dependent upon the coalition's ability to cut back spending,” he says.

Interest rates pinned to the floor until 2014

High energy prices and the increases in VAT will keep CPI inflation above target over the next 18 months, but ITEM believes that it will then move well below 2% as these effects wear off and spare capacity bears down on pricing decisions and wage bargaining.

To prevent CPI inflation moving below 1% it will be necessary keep the Bank base rate low at 0.5% for much longer than the OBR and the markets have anticipated. The ITEM forecast suggests that the base rate will remain on hold until the end of 2013, although this is dependent on the assumption that the impending spending cuts actually come through.

Spencer remarks:

“A base rate of 0.5% will begin to look like the new normal.”

European crisis

One of the bigger areas of concern for the UK economy is the escalating European crisis which could damage the recovery. Retrenchment in the Eurozone, the UK's biggest trading partner, could drag the area back into recession, undermining the value of the Euro, eroding demand for UK exports and weakening UK competitiveness.

As the prospect for exports is not as good as it has been in previous ITEM forecasts it is essential for UK companies to take the lead role in the recovery.

Time for business to bounce back

Despite the recent revival in the economy, the prospects for UK business spending and investment remain uncertain. “Company managers have been shell-shocked over the last two years, but they are starting to find their feet as uncertainty around the fiscal outlook begins to dissipate,” says Spencer. Larger companies in particular are generally in a strong financial position, certainly for this stage in the cycle, with plenty of profitable opportunities for expansion.

Yet with the pace of economic growth set to slow over the next two years business spending is still being held back, with company treasurers more likely to pay down debt than loosen the purse strings for investment opportunities.

However, the Budget should go some way to encouraging more investment, with a remarkably business-friendly tax package including reliefs for small business and projections for cuts in mainstream corporation tax.

Spencer explains:

“It is time for businesses to take advantage of the tax incentives presented in the Budget. This time the consumer is in no position to pull us out of recession, indeed the outlook for households continues to be bleak – what with pressures from the labour market, pay pauses and higher taxes there will be a major strain on real disposable incomes in the short-term.

"The impetus for the economy has to come from business spending, private sector employment and entrepreneurial initiative. Without that response, it will certainly be very hard for the government to pull off the trick of retrenchment and recovery.

"The coming years will inevitably be difficult for the UK economy. However, the emphasis on spending cuts rather than tax increases over the medium term reduces damage to incentives and increases the chances of success, as does the business-friendly nature of the tax changes.

"A reduction in the uncertainty around the fiscal and monetary policy outlook should also support investment and employment. However, this forecast – not to say the success of the coalition's fiscal strategy – hangs critically upon a positive response from UK plc and the financial markets.”

source: myintroducer.com 27th July 2010 

Base rate held at 0.5% to protect recovery

08 July 2010

The Bank of England's Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%.
The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion.

Simon Gammon, head of Knight Frank Finance, comments:

"This morning's decision by the Bank of England's Monetary Committee to keep the base rate on hold at 0.5% for the sixteenth month running came as no surprise following last month's emergency budget.

"Even though one of the new members of the Bank of England's Monetary Policy Committee voted to increase rates at its June meeting, this view seems unlikely to prevail for some time,” says Simon Gammon, head of Knight Frank Finance, which specialises in mortgages over £1m.

“George Osborne's budget got a largely positive response from the City and the consensus is that it could push any rate increase further into the future. Five-year swap rates have dropped to around 2.5% suggesting the market is not pricing in an imminent future increase.

"Even if rates seem unlikely to change for the next six months it is worth keeping in close contact with your mortgage adviser, he suggests. "There have been some very competitive five-year fixes on the market recently, some below 4%, but these are getting withdrawn very quickly as demand exceeds supply."

“If you are thinking about taking a new mortgage or renewing your existing arrangements at the current time it could pay to talk to an expert so you are ready to move quickly to secure the best rate."

Jonathan Samuels, CEO, Drawbridge Finance, says:

"Interest rates are on hold again but the hawks, led by Andrew Sentance, are beginning to circle. The minutes of this latest MPC meeting due to be published later in the month will offer a strong clue as to when Bank Rate will finally rise.

"Even when rates do rise, we expect the percentage increases to be small and incremental and this, coupled with the fact the market has already begun to price them in, is unlikely to put the property market into reverse.

"Higher rates will naturally add to the headwinds facing borrowers and the property market but at the same time they are a necessary evil, a key step back to a more normal functioning of the economy and lower inflation.

"The important thing is that the up-cycle, when it does commence, is managed smoothly to avoid shocks and enable the economy, markets and borrowers to adjust."

Andy Cuthbert, Managing Director of dot financial services, comments:

“As the first decision since the Budget there was only going to be one outcome as many of the Chancellors measures are still yet to have an impact. In his first Budget, George Osborne said that inflation will fall to 2.7% by the end of the year but this is without having seen the effect that the rise in VAT and huge public sector cuts will have.

"Done in a bid to reduce the public debt, there is a need to keep interest rates low in order to support this. In addition to this there is also the impending increase in unemployment levels and the uncertainty over the financial stability in the eurozone to consider therefore an interest rate rise now or in the near future would be premature.

"With all that lays ahead the country's recovery remains fragile and the Government needs to sustain stability in the market by holding interest rates. I predict that we will continue to see low interest rates, certainly in the short term.”

Ray Boulger of leading independent mortgage adviser John Charcol comments:

"The last time Bank Rate (and its predecessor rates) was unchanged for so long was 1952/53, covering the period when our Queen came to the throne and her Coronation. Despite various name changes in between back in those days the rate was called Bank Rate and was at 4% from 11 March 1952 until it fell to 3.5% on 17 September 1953.  Even this record looks almost certain to be broken in three months time.

"Since last month's MPC meeting the year on year CPI has fallen by 0.3% to 3.4%, although the committee had an early indication of this at its June meeting. Probably the most significant influence on the timing of a Bank Rate increase since last month's meeting was the budget. The market has responded positively to the confirmation provided by the budget that the coalition has adopted a more fiscally prudent policy than the previous government and swap rates are hovering around all time lows, with 2 year swaps at 1.43% and 5 year at 2.47%.

"One factor that drove inflation up was the weakness of sterling but the impact of this is now not only unwinding but the recovery in sterling is starting to exert the opposite effect. The combination of the Euro being under severe pressure and the budget removing any lingering fears about the UK Government losing its AAA credit rating has resulted in the improvement in sterling. It is now 12% off its low point last year against the Euro and 6% off its recent dollar floor only a couple of months ago.

"These factors all add to the reasons why Bank Rate will need to remain very low for an extended period and it looks increasing likely that we will not see a Bank Rate increase this year, especially as the markets are looking at the European Bank stress testing with increasing scepticism, although the four UK banks taking part should pass with flying colours as the FSA's stress testing was more robust. As long as a significant risk of turmoil in the Eurozone markets remains any rise in Bank Rate would be premature.

What does this mean for mortgages?

"Two year fixed rates offer little value but the gap between the rates payable on a 5 or 10 year fixed rate and the initial rate on a tracker mortgage has narrowed since the election, as the markets have reassessed the medium to long term outlook for interest rates. In general, lifetime trackers still offer better value for the time being, based on our expectation that interest rates will only rise slowly, but at current pricing the best 5 to 10 year fixed rates are now a viable proposition for those who want, or need, interest rate security.

"Anyone on a good long term tracker mortgage with borrowings in excess of £500,000 who wants some interest rate security should consider buying a 5 year cap as an alternative to switching to a fixed rate."

source: myintroducer.com 8th July 2010

Banks lending again to buy to let market

Like the Lettings market which is currently suffering from a shortage of stock, the mortgage market demand is exceeding supply but the lending market is moving again slowly and banks are beginning to make money from it, say waellis.

The best deals at the moment are 60% loan to value although I have come across 80-85% but these are very expensive. The main lenders are BM Solutions and the Mortgage Works, followed closely by Clydesdale Bank and the Bank of China but I understand there are twenty new lenders coming in to the market so it really does appear to be opening up.

With the Bank of England regulating banks now and checking people can afford mortgages, there is much tighter control. It is essential for the housing infrastructure that the Private Rental Sector continues to grow but with first time buyers who play a vital role in the housing ladder still struggling to get a mortgage, there is an imbalance.

Funding has dropped 81% since 2007 – in 2009, it dropped by 69% compared to 2008. There are 1400 less products than in 2007 but this is obviously now on the increase. There does appear to be a recovery in the Buy to Let market with competition back. Professional landlords are a good risk to lenders and the Buy to Let market is profitable for them.

Source: myintroducer.com 06 July 2010

BoE to keep interest rates on hold into 2012, predict cebr

Slower growth from fiscal tightening will cause the Bank of England to keep interest rates lower for longer, while a further fiscal squeeze could lie ahead if the Office Budget Responsibility's growth forecasts are too strong.

This is the key conclusion of the Budget Report analysis produced by one of the country's economics consultancies, cebr, and released in their Emergency Budget Reaction report.

The Budget saw Chancellor Osborne follow through on his commitment to cut the public sector deficit more quickly, with £32 billon of spending cuts and £8 billion of net tax rises announced.

The Office for Budget Responsibility downwardly revised its pre‐Budget forecast for growth in 2011 from 2.6% to 2.3% but we think this and the years following could still be too strong.

The OBR expects consumer spending to grow by 1.3% and 1.7% in 2011 and 2012 respectively. At a time when we expect unemployment to still be rising, real disposable income growth to be weak and bank lending to remain constrained, this seems too strong.

Furthermore, a strong bounce back in private sector investment is expected, but we think investment will recover more slowly in the aftermath of the financial crisis due to constraints in lending. Finally, the sluggish recovery in the eurozone, the United Kingdom's main export market, will hinder the export‐led recovery.

If growth is lower than the OBR expects, public borrowing is likely to have been underestimated and further spending cuts and / or tax rises could be necessary.

However, we expect the fiscal tightening announced will result in lower long term interest rates as bond markets react positively to clearer plans for reducing the deficit. In addition, the Bank of England may respond to slower growth by keeping interest rates lower for longer.

Charles Davis, managing economist at cebr commented:

"We think the Office for Budget Responsibility's projections for growth are still on the high side. We see a weaker consumer recovery and more risks to the export led recovery than the OBR.

"Although inflation has been above target in early 2010, the fiscal tightening means growth in demand will be weakened, so we expect the Bank of England to keep interest rates lower for longer, on hold at 0.5% into 2012."

Douglas McWilliams, chief executive officer at cebr commented:

"Bond markets reacted positively to the Budget today and we think long term interest rates will fall back over the coming months. This is good news for households as mortgage rates should fall back. However, with another VAT rise to stomach households will probably be feeling overwhelmed by bad news.

"The danger is that there could be more bad news to come. If the Office for Budget Responsibility's growth forecasts turn out to be too optimistic, as we expect, then more spending cuts and tax rises could be necessary.

"Coming out of the financial crisis, we expect growth to average of one and a half percent in the UK over the next three years, whereas the OBR is forecasting a two and a quarter percent growth. If growth is lower, it could mean around £10‐£20 billion more cuts could be required."

Source: myintroducer.com - 23 June 2010

Home ownership to be encouraged, says Shapps

Aspiration to home ownership will be encouraged, says housing minister Grant Shapps.

In his first speech as housing minister, he said that the age of aspiration was back, and he underlined the importance of first-time buyers to the market.

Speaking at the RICS headquarters in Westminster yesterday morning, he said it was not right to deny a new generation something his own generation had enjoyed – the chance of home ownership.

He added: “This new Government is not in the business of pouring cold water on people’s aspirations.”
 
He said it was human nature to aspire to owning the roof over one’s head. And he promised: “I will work every day to help people achieve their aspirations to own their home.
 
“Of course, I am not arguing that everyone should somehow aspire to home ownership. Renting a home can be a positive and flexible choice. And social housing provides a sense of security for millions of families.

“I am simply saying to those who aspire to own their own home: this Government will support you. You will not be ignored. The age of aspiration is back.”

He went on: “There are an estimated 1.4m households who aspire to own a home but are unable to do so because of house prices and mortgage availability.
 
“There are hundreds of thousands of people in rented accommodation, or living with parents, who yearn to be first-time buyers. It is now true that the average age of the first-time buyer is 37.

“That 37-year-old is not asking for a hand-out: they just want a chance. We need to give them that opportunity.”
 
Talking about the massive challenge to beat Britain’s financial crisis, Shapps said it was important to create a stable housing market.

He said: “We will need to work together across the housing market – builders and surveyors, lenders and brokers, regulators and agents – to ensure that the conditions which created the housing bubbles of the past are never repeated.

“But there are still difficult adjustments to be made and I know that market confidence remains fragile. There is a risk that the market may not respond to changing conditions quickly enough, leaving creditworthy borrowers still out in the cold.

“I see responsible lending and responsible borrowing as two sides of the same coin. Borrowers will need to demonstrate financial responsibility and show that they can sustain home ownership. In return, lenders will need to support creditworthy home owners.”

Turning to HIPs, he said: “Expensive and bureaucratic Home Information Packs increased the cost and hassle of selling homes. We have ripped up red tape that was strangling the housing market recovery.

“It is a move that has already started to have an impact – the number of homes coming to market immediately jumping by a third.”

He said the new Government would promote shared ownership schemes, and wanted to see more house building. It would give planning powers to local people.

“Rather than being told what to build and where, residents of villages, towns and cities will be able to develop their own vision for their place.

“We’ll introduce Local Housing Trusts, enabling communities to create new housing for local people.

“We understand that the transition to a more open, transparent and democratic planning system is not entirely anxiety-free for many involved.

“But we know that there is no future in this centrally planned system which has so dramatically failed, delivering fewer homes now than during any peacetime year since 1924.

“By unleashing the aspirations of communities as well as individuals to build homes where and when they are needed, we will bring about greater certainty. Certainty that will replace the conflict caused by imposing housing numbers from right here in Whitehall, and certainty that will give investors confidence to invest.”

Source: myintroducer.com Wednesday 9th June 2010

House prices move closer to 2007 peak

The price of a typical UK property rose by a seasonally adjusted 0.5% month-on-month (m/m) in May, following a 1.1% increase in April, reveals the latest Housing Market Review from Nationwide.

Commenting on the figures Martin Gahbauer, Nationwide's Chief Economist, said:

"The smoother 3 month on 3 month rate of increase rose from 1.1% in April to 1.7%, as February's fall in house prices dropped out of the most recent three month average. The annual rate of house price inflation dropped from 10.5% to 9.8%, which reflects the weaker pace of increase in May 2010 relative to May 2009.

"Since reaching a trough in February 2009 – following a drop of 19.3% from their October 2007 peak – house prices have risen by 12.2% and are now just 9.5% below the October 2007 peak.

“Housing market conditions remain characterised by thin transaction volumes and a relative scarcity of properties for sale, despite a slow return of more sellers in recent months. The current supply-demand balance on the market is still consistent with relatively stable to modestly upward trending prices.”

Source: myintroducer.com - 3rd June 2010

Removal of HIPs gives UK housing market a boost

The latest Agency Express Property Activity Index shows that the UK housing market received a massive boost last month with the abolition of Home Information Packs which contributed to a significant increase in housing activity.

In May there was a 13.6% increase in the number of homes being put up 'For Sale' which was up a massive 89.4% on April 2009's level. It was the highest level seen for more than two years (since April 2008).

There was also an increase in the number of properties 'Sold' in May with activity up 8.6% on April and 17.0% up on May 2009. May's sales were the third highest monthly level since April 2008.

Commenting on the latest Index results, Stephen Watson, Managing Director, Agency Express, said:

“It appears that the result of the General Election has had a direct and positive impact on the housing market. The decision by the new coalition Government to immediately suspend the requirement to have a HIP seems to have taken away a significant obstacle that has been discouraging homeowners from putting their properties up 'For Sale'.

"The good weather we saw in May also helped to increase sales activity to levels we haven't seen consistently for over two years. Only one region didn't experience an uplift in sales in May which augurs well for the next few months.”

Regional hotspots for house sales in May:

- West Midlands – up 25.8%

- Wales – up 24.6%

- South West – up 17.5%

- North West – up 16.2%

- London – up 13.0%.

Only the South East saw a fall in house sales in May with a 6.6% drop.

Birmingham was the UK's best performing city where there was a huge 71.4% increase in the number of properties that were sold in May, followed by Newcastle with a 41.4% rise, Cardiff with an increase of 36.4%, Manchester which was up 28.4% and Exeter which jumped 28.1%.

Regional hotspots for houses put up 'For Sale' in May:

- Wales – up 27.2%

- Scotland – up 21.7%

- North West – up 21.2%

Southampton was the city that saw the greatest increase in houses being put up 'For Sale' with a rise of 48.4% followed by Glasgow where there was an increase of 37.7%, Brighton with an increase of 34.6%, Cardiff up 31.1% and Carlisle up 28.2%.

Source: myintroducer.com 2nd June 2010