Mortgage Rates

Document-low mortgage charges imply home costs are more likely to hold rising


The latest survey of real estate agents and experts shows that the people closest to the sharp end of the real estate market expect prices to continue to rise.

According to the Royal Institution of Chartered Surveyors, sales have declined somewhat now that stamp duty vacation is due to expire. But they’re still well above pre-Covid levels, and most respondents expect prices to be higher in the next 12 months.

And when you look at what’s going on in the mortgage market, it’s hard to argue with them …

What really drives real estate prices

Real estate prices are booming worldwide. It’s an important economic side-effect of Covid-19. First, working from home made many people want to move, both because their existing property was too small and because their commuting was no longer so important.

Second, governments did much more than ever to replace people’s incomes, while central banks lowered interest rates and encouraged risk-taking.

So as soon as people were allowed to start looking for an apartment again, they went wild.

This is, by and large, the story as it holds true around the world. There are some individual wrinkles – here in the UK, for example, the stamp duty cut has had to boost some sales.

But the end of that stamp duty vacation in and of itself isn’t a reason to expect a drop in prices – just a drop in activity. (And possibly a short one). Because the two basic drivers are still there.

And now there is another one to fight with. A massive mortgage price war between the high street banks.

Physical supply and demand is an issue in the real estate market. Of course it is – this is basic economics. There are many things on this side of the business that could be improved to increase housing availability and affordability.

But in my opinion, mortgage rates and availability are by far the biggest factor. The physical supply of houses will always change more slowly than the amount of money that is available for them. So if that money supply drops quickly, house prices will crash. And when it goes up, prices go up.

It’s easy to forget that now, but it wasn’t until 2018 that real estate prices hit a wall around the world. Why? Because interest rates began to tick higher. That reduces the amount of money that can be spent on homes.

Right now, however, the amount of money that can be spent on homes is increasing. And things are looking up quickly.

What that means for buyers and investors

Mortgage rates are now falling rapidly from already low levels. As Samuel Tombs of Pantheon Macroeconomics points out, assuming a 25% deposit, the interest rate on a typical five-year fixed-rate mortgage hit a post-Covid high of 2.05% in November last year.

In April of this year it was 1.72%. Last month it hit a record low of 1.48%. Those with even larger deposits (or equity) can now get a five-year fixed-rate mortgage for less than 1%. This is extraordinary – it’s the first time it has happened. Meanwhile, Halifax has just started a two-year fixing at 0.83% – another record low.

Do not get me wrong. There’s the fine print – agency fees tend to be high, so you’ll need to borrow enough money to make it worth it. And, Pantheon adds, for those who borrow 85% or more of the property’s value, the interest will still cost more than it did before Covid.

However, these courses “also fell quickly”. Perhaps more importantly, the other side of the equation – saving for a deposit – has also improved during Covid. “Around 20 percent of those who have accumulated savings report that they plan to use some of them to make a deposit on a property.”

So the race to the bottom is on in all areas of the mortgage market and demand is high too. While I’m not particularly fond of saying it, we have now come to a point where the bull market is somewhat detached from what the Bank of England is doing, because banks are now competing fiercely with one another.

In other words, interest rates are falling because banks are trying to undercut each other and do business, not because the Bank of England interest rate changes one way or another.

If this continues – and I don’t see why it should stop so quickly – then individuals will be both willing and able to pay more for real estate. As a result, prices will continue to rise.

Well, if you are a first time buyer or are buying a home to live in, there is no point in worrying about it. There are other factors to consider when buying a home.

As a real estate investor, you know the market better than I do. Being a landlord has always been a great challenge for me. But if you can find a way to make this work in the face of the less favorable tax regime, then I have to admit that I am less negative about residential real estate investments than I have been in a long time.

Although I would still be very careful with the direction of political travel (large landlords are in favor – small private ones less).

Finally, if you are into stocks rather than real estate, here is one point to consider. House price booms go hand in hand with consumption booms. People are starting to borrow money against their homes to spend again. That bodes well for the UK’s continued rebound – it suggests it will have legs. This is another reason to feel comfortable holding onto UK stocks.

Oh, and if you’re into commercial real estate, check out the latest issue of MoneyWeek magazine tomorrow. My colleague, Cris, takes a deep dive into the best sectors and the best countries to invest in. Get your first six issues for free here if you don’t already have a subscription.