Mortgage Market Update
Market Update – You would have been living under a rock if you haven’t been caught up a debate that starts with the letter B this week. I have remained relatively tight lipped on the subject to date, mainly as I am not a political commentator or indeed, even a financial market analyst. However, it seems timely to address the issue.
I am old and ugly enough to have seen a few market cycles since I started working in banking in 1999. So in times of uncertainty, I tend to look at long term trends. So for example, if you bought a property in 1999 for £250,000 what do you think that would be worth today? A staggering £1,049,240 according to the Nationwide’s house price calculator. Don’t believe me? You can check here or see the table below which shows the 319% growth in that time. It’s one of those anecdotal things, but it does seem to be true, that London house prices double about every 10 years. Now as we know kids, past performance is not an indication of future returns, but is this trend sustainable? Sadly I think so. Just over a week ago Simon Ruhensohn, chief Economist of RICS (the Royal Institute of Surveyors) said “Buyers do appear to be returning, albeit relatively slowly, but the big issue that continues to be highlighted by respondents is the lack of fresh stock on the market,” he added. “Although this is not a new story, it is a significant one, having ramifications for both prices and the level of turnover.” This is the simplest dynamic of any market – supply and demand – there simply isn’t enough supply of London property, so prices continue to rise. And have done so for the last 20 years as illustrated below.
So am I concerned about the B word? In a word, No. The only thing that would change my view would be if banks stopped lending like they did back in 2008 (and a reminder, that due to new FCA requirements, Banks have 3 times the capital they had in reserve today, than they did back in 2008) or we embark on a huge house building scheme, the likes of which we have never seen. I suspect our wonderful politicians will have their hands full the next few months, so passing domestic bills seems off the table for now, so the latter is also unlikely.
This period reminds of my two favourite quotes, make of them what you will:
Rate Update – Money markets have been pretty flat over the last week. SWAP Rates – 2 year money is at 1.206% (down 0.022%) and 5 year money is at 1.442% (down 0.049%). LIBOR was at 0.885% (up 0.019%). This flatness will be largely due to financial markets digesting what happens this week, but certainly no major reactions so far or panic in the markets. The same is true with the FTSE 100 remaining relatively flat in the last week.
This is relevant as banks largely price their fixed rate mortgages off SWAP Rates, and variable rates off LIBOR. On both fixed and variable rates, lenders will typically add about 0.5% as a starting point to the rates above to create the mortgage products they offer. However, the rate you will be offered is heavily dependent on your circumstances and deposit/equity level.
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