If we look back to the US mortgage crisis of 2008, who would have thought that EU base rates would be 0% and UK base rates 0.75% more than a decade later? If you also throw Brexit into the mix there could be some serious headwinds approaching the EU and UK economies. On the flipside of the coin, have markets looked at a worst-case scenario for Brexit due to a lack of detail?
When looking at the UK mortgage market, which is currently extremely competitive and very liquid, when is the best time to take out a mortgage or remortgage a property? In reality the only time we can be certain of mortgage rates and interest rates is today. Just prior to the EU referendum in the UK there were indications that UK interest rates had bottomed out and would start to rise. In light of Brexit and various ongoing challenges, that scenario would now appear to be some way off. So, what should you consider when looking at a mortgage or remortgage?
In this article will take a look at the economies, mortgage markets and property prices in the UK and briefly consider the situation across the EU. In reality the prospects for any economy will impact the short to medium term direction of interest rates and mortgage rates.
If we look back to GDP growth since 2009 it is not difficult to see it has been subdued in recent times, compared to the boom times. The graph below highlights the annual change in GDP which shows by how much the UK economy grew and contracted. However, many people might be surprised to learn that the UK economy has held up rather better than media headlines might indicate. While recent figures suggest that UK GDP contracted by 0.2% between April and June 2019, many expect this figure to be revised upwards to zero or slight growth in due course. So, while the mass media have been publicising the fact the UK economy has contracted there’s a chance this could be “corrected”.
So, maybe the UK economy is not as weak as many people might suggest? How a no deal Brexit would impact the UK economy is anybody’s guess but even the Bank of England has upwardly revised its doomsday forecast of GDP from -8% to -6.2%.
United Kingdom GDP Annual Growth Rate
Those who follow the EU economy will be aware that recently the ECB announced yet another quantitative easing programme to offset an expected weakness in the EU economy. Germany is on the brink of tipping into recession; France has briefly pulled away from such a scenario while many other EU member states are struggling. Despite a reluctance to discuss the ongoing problems in Greece, this is yet another situation which is not reflecting positively on the short to medium term prospects for the EU economy and the euro.
In a similar situation to that currently emerging in the UK, we also have a number of doom and gloom forecasts for the EU economy. You might notice that when economist issue a range of potential impacts on the EU economy going forward, the mass media tends to focus on the most negative scenarios. As with the UK, there are some in the EU who are in danger of creating a self-fulfilling prophecy in the short to medium term.
European Union GDP Annual Growth Rate
It is fair to say that since the EU referendum back in June 2016 there has been a significant fall in the value of sterling against the dollar and the euro. Recent days have seen a degree of volatility in the marketplace amid rumours and counter rumours that Boris Johnson may be on the verge of agreeing that elusive Brexit deal with the EU. In many ways this shows the fragile nature of sterling at this moment in time.
Foreign property investors have seen not only a reduction in the real value of UK property but an added bonus due to the weakness of sterling against the dollar and the euro. Quite how sterling will perform in the short to medium term is unclear but we are unlikely to see a swift return to levels seen before the referendum. This is likely to encourage overseas investors to remain active, especially in the UK luxury property market.
Sterling v Dollar
Sterling v Euro
There are concerns that the UK economy could well slip into recession if there is no deal on Brexit before 31 October 2019. As we touched on above, the Bank of England recently revised its worst-case scenario for UK GDP from -8% to -6.2%. This is a significant change in the Bank of England’s forecast for the future and perfectly illustrates the fact we are currently entering the unknown.
Looking towards the European Union, Germany is on the verge of recession; France is flirting with GDP contraction and the likes of Spain and Portugal are still struggling. However, it is worth noting that the ECB recently approved a sizeable quantitative easing programme which will help breathe life into the EU economy as a whole.
The subject of Brexit is never far away from the headlines and is causing serious political uncertainty in both the UK and the EU. Many believe that a deal will eventually be brokered between the two parties probably at the 11th hour. However, in the short to medium term businesses are reluctant to invest without a degree of certainty. Therefore, this will have an impact on short to medium term economic performance creating a scenario where interest rates are likely to remain low for the foreseeable future.
Political certainty creates the very foundations upon which economic policies are based but things are far from certain in the UK and the EU. In the UK we have a government without a majority while in the EU we have a leading body which does not currently reflect the thoughts of all members. These are situations which will not drag on for much longer and when businesses can see a degree of certainty they will likely switch on the investment tap and start to look ahead to the future.
Sliding interest rates
As you will see from the graph below, UK base rates have been flirting with historic lows since the 2008 US mortgage crisis. The current base rate of 0.75% may well come under pressure in the short to medium term depending upon the outcome of Brexit negotiations. Against this backdrop of relatively low UK base rates, and mortgage rates, it is worth noting that the UK house price uptrend is still in place (however fragile that may be in the short term). In reality there is relatively little room for manoeuvre with UK interest rates on the downside thereby creating a floor for mortgage interest rates.
While there are many factors to take into consideration when looking at UK property, it is worth comparing and contrasting the return on cash deposits against the rental returns on UK property. In reality there is no comparison; many savings accounts are paying minimal if any interest with some properties attracting rental yields in excess of 4% and sometimes double-digit yields with HMOs. If, as many expect, UK base rates remain low in the short term then it may well be time to consider a mortgage or remortgage.
UK Base Rate
When looking at average UK property prices over the last few years there has been a degree of volatility but the long-term uptrend appears to be intact. This may come under pressure in the short term but let’s not forget the other factors such as:-
• Chronic shortage of newbuilds compared to demand
• Expanding UK population
• Growing demand for private rental properties
The situation regarding newbuilds is an issue which will take years to resolve with no quick fix. We are talking of a shortfall of literally tens of thousands of new build properties despite various government promises.
Average UK Property Prices
Pool of lenders in the UK
The UK has one of the most competitive mortgage markets in the world which puts the fragmented European market in the shade. Despite various attempts by the EU to power grab over the years, London remains one of the key financial markets of the world and the UK one of the most liquid mortgage markets. There are various factors to take into consideration regarding the number of lenders in the UK including:-
• Genuine competition amongst all lenders
• Downward pressure on mortgage interest rates
• A wider breadth of services compared to the European market
• Greater flexibility
Here at Enness our independent status means that we can negotiate with in excess of 300 lenders in the UK and across the world. You will also have noticed that the last few years have seen an array of niche market lenders arriving on the scene. So we have the traditional banks, private banks and a growing range of niche lenders. Interestingly, a number of investors looking at European property are now seeking finance from UK-based mortgage companies with operations covering the EU.
Liquidity is at an all-time high
While UK base rates have been slashed to support the economy, do not underestimate the power of “cheap finance” amongst lenders. There is also the fact that the UK property market has remained relatively strong compared to the doom and gloom forecasts of recent years. Once the clouds of Brexit have been removed the UK government can get back to “the day job” of managing domestic policies across a range of different areas. It is also worth noting a significant rise in the number of remortgage proposals which makes perfect sense with rates at or near their all-time low.
Cheap mortgage rates
If we look at the luxury property market there are some extremely attractive mortgage rates available at the moment both in the UK and mainland Europe. Such is the huge liquidity in the market place, five year fixed mortgage rates as low as 0.5% have recently been reported. The flexibility of the million pound plus mortgage market allows potential clients to fully utilise not only their income but also security and assets under management. Private banks in particular are extremely keen to nurture long-term relationships with new mortgage clients in exchange for extremely attractive short-term mortgage rates.
Due to our independent status we are able to negotiate with more than 300 individual lenders across the UK and global money markets. We have extremely strong relationships with many lenders allowing us to create bespoke mortgage arrangements which add a degree of security for the lender and fully utilise assets/income for the borrower. At this juncture, there would appear to be limited further downside for UK/EU base rates and, as a consequence, mortgage rates. On the flipside of the coin, if the UK government was to somehow negotiate an acceptable Brexit deal in the short term then we may see a relief rally in investment markets. This could see the emergence of upward pressure on interest rates and the rebasing of current mortgage rates.
LTV ratio in UK increasing
It is worth noting that while the £1 million plus mortgage market is still regulated there is a greater degree of flexibility amongst private banks and niche lenders compared to their traditional banking counterparts. As a consequence, as we touched on above, a well-structured mix of income, security and assets under management has led to an ongoing rise in LTV rates. The transfer of assets under management ensures that private banks will always have a degree of insurance with the opportunity of nurturing a long-term client relationship.
Attractions of London luxury property
London is the epicentre of the UK luxury property market, attracting investors from all around the world. Despite an array of negative forecasts going forward, as you will see from the graph below, average London property prices are just under the level seen immediately after the referendum. The luxury end of the London property market was initially hit on concerns about Brexit and the UK economy but there appears to be a relatively strong backbone. The reduction in the number of property transactions (see graph below) over the last few years, and scarcity of properties for sale, indicates a reluctance from owners to sell at current levels.
It is also worth noting, as we mentioned above, that since the referendum the significant fall in sterling against both the euro and the dollar has attracted more overseas investors. Even though average London property prices are just below their June 2016 level those transacting in dollars and euros have seen their spending power increase by up to 20%. The fact that we are fast approaching what many believe will be the endgame for Brexit may see more overseas investors take advantage of the current concerns.
Average London Property Prices
London v UK – Rebased Annual property transaction numbers
The London luxury property market is essentially a market within a market in the UK. While sceptics will suggest that prices are falling because of sustained selling pressure, the statistics do not suggest this. The recent performance of the London luxury property market, compared to the rest of the UK, is akin to the deflating of a property price bubble in challenging times. There are however encouraging signs towards the higher end of the market with regards to transaction numbers, sale prices against asking prices and buyer interest. Is this an indication of domestic and international buyers taking advantage of historically low mortgage rates before upward pressure returns?
There have certainly been pricing pressures on both UK property and EU property assets since the 2008 financial crisis and more recently in light of Brexit. Political uncertainty also breeds concern within economies with many businesses switching off their investment taps until Brexit is resolved and the political situation is on a sounder footing. Some experts believe that the UK is approaching a potential bottom of the economic cycle were growth forecasts and interest rates are based upon a worst-case scenario. Even the Bank of England has reined in its worst-case Brexit GDP scenario from -8% to -6.2% which supports the theory of historic over pessimistic forecasting.
It is also worth noting that relatively cheap finance available to mortgage lenders has led to huge competition amongst mortgage providers – especially towards the higher end of the market. Using a mix of income, security and assets under management it is now possible to negotiate extremely competitive short term fixed mortgage rates. The key to long-term property investment is making use of cheap finance, locking in fixed interest rates and utilising income, security and assets under management. It can be easy to get caught up in the current volatile situation, but take a step back, and consider the long-term trend in UK mortgage rates and the attractions of current levels.
There are certainly signs that property investors are taking advantage of competition in the market together with historically low interest/mortgage rates.