Mortgages are up but don’t get too excited

What should we read into recent signs of a gradual recovery in the mortgage market? The answer is, it depends. Taking into account distortions caused by the work-from-home exodus from London and the cost of living and it looks like we may simply be returning to precedented times, says Steven MacDonald

When it was announced mortgage approvals for February had hit a 17-month high, it seemed grounds for cautious optimism at least. The figures are heartening; the highest approvals since September 2022, beating economists’ expectations and effective interest rates down to their lowest since last summer. Moreover, wage growth is now outpacing house prices, which augurs well for the future – two cheers for a gradual recovery! But can we take any readings about the future from what is happening at the moment? What does it mean for lenders, borrowers and the market as a whole? 

A deeper reading of the figures shows nascent growth is unevenly spaced in all senses. Perhaps the clearest indication that ‘it’s not that simple’ is the confused narrative around house prices. Official ONS show average prices declined in the 12 months to December 2023. But last week’s Halifax figures showed that March’s drop was actually the first fall in six months. We all know the truism about statistics but even the most altruistic search for accuracy is hard. Measurement boundaries make a real difference – as does context. Higher interest rates were an attempt to slow inflation but that inflation has in turn masked the true scale of price drops. Adjust for it and a nominal price rise may turn out to be a real-terms cut.  So are house prices rising, or not? 

The answer is: it depends. Average prices were hit by a combination of higher borrowing costs, pressures from the living costs and resulting consumer uncertainty. Now, a combination of real wages growth and a buoyant jobs market is starting to reverse that. But the effects are being felt very differently in both sectors and regions – and there are other factors driving consumer behaviour.  

One might, for example, expect higher-value homes to be holding value, as that market sector is less exposed to marginal income fluctuations but the picture is more nuanced. In fact, estate agents report Home Counties properties across the board posting discounts of up to 10 per cent or more. And it is properties further from London that seem to be seeing the greatest drop. Meanwhile, figures on higher-value houses from Zoopla show two things. First, areas near the coast are seeing greater dips. Second, Greater London and the commuter belt is outperforming everywhere else. In other words, for higher-net-worth individuals, physical distance from London is suddenly key. Almost one in eight London buyers is now from outside the capital – the highest proportion since 2009. And why? It seems we are seeing concrete evidence that the work-from-home boom  – which drove up prices in attractive locations, as high-flying professionals realised they could do their jobs from country rectories and picturesque fishing villages – is over. As corporate employers increasingly demand regular office presence, it is having a real-terms effect. 

The other factor for many of those areas will be second home ownership. In his Spring Budget, the Chancellor firmly set his sights on second home owners, with a pincer movement of abolishing tax relief on holiday homes and lowering taxes on their sales. Some councils, such as in Wales, are going further, hiking council taxes exponentially on second properties. Add in the fact that smaller private landlords were already staging an exodus from the sector  – owing to increased regulation and costs –  and there is a recipe for ructions. Some communities will welcome the end of an era where half the population disappears in the grey months. Others will mourn the lack of tourist income. Anyone wanting to invest in a property – to live in or to rent out – may be in a position to pick up a bargain, but they will want to get very good advice first. 

So what does this all mean for mortgages in the longer term? All indications are that interest rates – which started to spike in November 2021 –  will have softened by 2026, and we are now living through a five-year-period that may later come to be seen as an outlying ‘blip’. Add in the distortions of the cost-of-living crisis, and the disarray from hybrid working, and it seems likely we will come to look back on the first half of this decade as something of an outlier. Eventually, rates will fall, a bit, prices will rise, a bit, and lending will increase, slowly. For most of us, it will frankly be a relief to return to ‘precedented times’. 

In the meantime, there is still plenty of business to be done, but only for those who are really prepared to do their research.

Steven MacDonald is national intermediaries strategy lead at Handelsbanken