Every six weeks the financial world raises its eyebrows at the prospect of a rate cut, causing celebration when the Monetary Committee duly obliges.
There are few businesses or consumers so directly impacted by base rate cuts than those in the property sector. After recent years of higher mortgage rates, first-time buyers may hope that rates may get back down to those all-time lows and that lower rates will be a helping hand to get on the ladder.
After the recent stamp duty change, there’s certainly a staleness in the air. The market feels sluggish; sentiment is down and there simply isn’t the quantity of buyers on the market currently to make it feel busy as it once was.
The number of houses on the market is increasing, and yet affordability remains painfully low due to high prices and cost of living crisis creating an environment in which it’s difficult to save for a sizeable deposit.
In this context, it is easy to see why everyone wants a property market revival, but rate cuts are only part of the answer.
Rate cuts are only good for some
Rate cuts, alongside some other popular policy changes like stamp duty cuts, all lead in one direction: House price inflation. Looking at past base rate cut cycles, house prices increased by 8% on average in the year following. While this might be great for existing homeowners potentially looking to sell, another rise in house prices, however small the percentage, can spell disaster for first-time buyers despite the fact that they believe the exact opposite.
The plain and simple fact is that mortgage lenders stress test affordability beyond the headline rate. If the base rate comes down but standard variable rates stay where they are, it won’t do anything to help increase the number of would-be buyers passing affordability checks.
Even if it did, it arguably wouldn’t make an enormous difference to the market. The reason first-time buyers cannot get onto the property ladder is not because they cannot afford monthly mortgage repayments, many first-time buyers already prove they can afford what would be their mortgage costs with ever-increasing rent.
Instead, the reason is rising house prices and the enormous growth in deposit requirements that come with them.
The average 18-24 year old has £4,759 in savings, rising to only £9,357 for 25-34s. The average house price in the UK is £268,652. You don’t have to be a maths whizz to work out that saving the extra funds needed for a deposit simply isn’t feasible. As the latter number rises, the hopes of homeownership dwindle.
INNOVATION
We need to stop telling the market of first-time buyers that lower rates will help. Instead, we need to be giving them products that meet their needs. This is why low-deposit options have had such a positive reception, with the number of products on the market reaching a 17 year high earlier this year. This year has also seen the return of 100% LTV lending and other products designed to reduce the up front cost to buyers.
This is an example of our industry taking practical action and meeting the growing needs of consumers and moving away from a tendency to rely on short-termism. We can no longer pretend that policies aimed at encouraging both lending and spending in the short-term does not create longer-term consequences that will have a negative impact on a first-time buyer’s ownership prospects.
As rates fall in an effort to stimulate economic growth, we need to take off our rose-tinted glasses and be honest with our young people and stop acting like rate drops are a silver bullet solution to their housing woes.
In fact, a rate cut this Thursday might just be the worst thing possible for first-time buyers who simply can’t get over the house price hurdle, let alone secure a low-rate mortgage. But we should remain optimistic too – there is plenty we can do to help first-time buyers and we should start with innovation.
Whether it’s changing stamp duty, continued regulatory reform – including the recent LTI cap changes – different products that showcase the certainty and security of long-term fixed rates or something else entirely, we cannot keep going as we are and expecting different outcomes.
Desperately chasing low interest rates falls into the latter category, and it is not the way to fix our market.
