In this week's blog, in addition to the usual house price round-up, with three monetary policy committee meetings still to come this year, we look at two data sets that wouldn't be the obvious go-to when predicting future Bank of England decisions.
Looking firstly at house price data, the latest Halifax index data certainly reinforces our assumptions from quarter one of this year; we are now almost at the apex of the supply-demand imbalance, and although significant homebuilding announcements have been made this week, such as the structuring of a Master Development entity between Barratt Developments, Homes England and Lloyds Banking Group, these sorts of supergroups comprising of an ensemble of heavyweight and respected industry peers, as significant as those ten thousand units created will be, it will take several years before any dent is made on the growing demand requirements. Residential property prices are up 4.3% year on year, and the Halifax themselves talk about a structural undersupply and how mortgage rates have fallen, but not to the point where they are having a significant impact on increasing new market entrants. Moneyfacts UK Mortgage trend report states that two and five-year fixed deals fell by 0.21% and 0.18% in August, so on the one hand, rates are falling. However, without being overly semantic here, when falling from a great height, you're still relatively high in the initial stages of the descent.
What's less noticeable and slightly more bullish regarding the published data is the overall health of the mortgage market as measured by the Bank of England in their latest Mortgage Lender and Administrator Statistics report. These sorts of reports are beneficial when hypothesising about future interest rate decisions, as aside from the apparent institutional connection, they provide a fuller glimpse into how monetary policy contributes to the overall health of the market beyond the ever-inflating price of a loaf of bread. The apparent assumption is that in a higher-rate environment, the overall amount of mortgage advances would decrease, even considering remortgages. However, two key stats worth monitoring are the proportion of lending to borrowers with a higher loan-to-income ratio and the default and arrears data. Since 2008, the overall system hasn't allowed unchecked leverage; however, it's had to allow for ever-increasing loan-to-income ratios simply because the asset prices have outstripped people's income in ever-increasingly dizzying circles. The good news here is that there is no evidence to suggest that LTI ratios have been inflated for commercial endeavours to countermeasure the slowdown in sales due to higher bank rate, and that's also reflective of the new arrears data, down by 0.5% since the previous quarter. A healthy mortgage market, as we know from past sins, isn't the volume of the product; it's the performance of existing debt, which has been well curated throughout this period.
UK credit card debt is the second data set worth monitoring when looking at forward indicators for inflation and rate decisions. Typically, what will happen under challenging economies is that levels of personal debt rise, and an economist looking at things in monetary terms will attribute this to rates increasing and inflation creating a cost-of-living crisis. Rates rise, people spend less, and inflation cools. In a debt-driven economy, people continue spending when they can't afford things; they stop spending when they can't afford to borrow anymore, so rates go up, and inflation doesn't cool for a sustained period until levels of personal borrowing plateau. So, in the period of incremental hawkish bank rate decisions post the mini-budget, we saw the UK collective credit card bill run up from 55 billion to 70 billion GBP, and the tab for the BNPL run to 30 billion GBP. As consumers become increasingly reliant on an economy of credit, merchants slowly pass these processing fees on to the customers via higher and higher prices, hence seeing the consumer debt pile beginning to flatten is a positive signal that inflation is going the right way, and that's what we have seen over the last quarter.
To summarise, one of the core barriers to entry in our industry is confidence when pricing and rate have been a moving target. The reliance on these central bank decisions that dictate so much of our clients' forward planning and strategy has been a burden to bear; however, perhaps now more than ever, we are seeing increasingly positive signals everywhere that borrowing costs will reduce throughout 2025 across the market, unlocking the liquidity our sector needs to thrive.
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