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China's economic crisis will not hit UK housing market, say experts UK interest rates on hold until autumn 2016, City predicts
(about 3 hours later)
China’s economic woes will set back interest rate rises in the UK by two to three months but this will not have any significant impact on the housing market, claimed a leading economist. The first rise in UK interest rates could be delayed until autumn 2016, according to City expectations, as market turmoil in China raises the prospect of historically low borrowing costs staying in place for longer than expected.
Richard Woolhouse, chief economist at the British Bankers’ Association made the comments following fresh data from the BBA that showed that the number of people remortgaging to cheaper deals in July was at its highest level for four years. The forecasts came as signs emerged of homeowners scrambling to remortgage over the past month in anticipation of a rate increase that might now be delayed.
“In July people were concerned about an interest rate rise and I think this led to a rush in remortgaging,” he said. On Wednesday, the British Bankers Association (BBA) said the number of people moving to fix their loans at low rates was at its highest level for four years. It followed Bank of England governor Mark Carney’s indication in mid-July that the Bank could raise interest rates early next year.
“Everything that has happened in China this week puts the likelihood of that rise back two to three months. But even if rates do go up in the near future I don’t think mortgage rates will go up as much and in any case this won’t impact much on people’s decision to buy a house.” With the FTSE down 15% from its April high, however, and China cutting interest rates to prop up its slowing economy, City traders have rapidly lost confidence about rate rises in Britain.
He said that people will still do “whatever they can” to get on the housing market in the face of continuing house price rises. Rate rises, even if they are delayed, will be small and gradual – rising to 3% over the next five years, he predicted. Market traders had been priced in a rise from the current rate of 0.5% next May, according to analysis by Capital Economics, but in the past few days this has been set back to late September or early October 2016.
“Even if rates go up faster than expected I don’t think that would affect the housing market. The fact is that price rises are being driven by a shortage of housing and demand outstripping supply.” Related: US interest rates are going nowhere fast despite upbeat news at home
The BBA figures show that overall the number of mortgage approvals in July were 15% higher than a year ago, with house purchases rising 11% and remortgaging nearly 29% up – to its highest level for four years. This was as a result of borrowers continuing to lock in to what are now the lowest price fixed rates ever in order to maintain control of their mortgage costs, said the BBA. Michael Saunders, chief UK economist at the investment bank Citi, said his main forecast was still that the Bank would raise rates in early 2016, but added: “It would not be a big step to expect that bank rate at end-2016 will still be 0.5%”.
Richard Sexton, director of e.surv chartered surveyors said that a fear of rising interest rates had been helping to drive levels of remortgaging but suggested that an anticipated delay in that rate rise would not change things significantly. Reactions to the market selloff may be overblown, said Paul Hollingsworth, UK economist at Capital Economics. “Recent equity market volatility and the further fall in commodity prices is probably the final nail in the coffin for those entertaining the possibility of a rise in bank rate this year. But we think markets have gone too far in expecting the MPC to hold off until October next yea,” he said.
“A fear of rising interest rates isn’t the only factor that can push remortgaging levels upwards,” he said. “A positive combination of wage growth, low inflation and healthy house price growth is contributing to a mix of economic good news which is supporting the remortgage sector. Many homeowners now have a much stronger financial footing.” “China’s recent economic data suggest that growth remains sluggish, but not weak enough to justify fears of a ‘hard landing’. In addition, the UK’s trade links are still fairly small, with only around 5% of goods exports going to China.”
The figures from Britain’s high street banks tallied with those of the Council of Mortgage Lenders, which were released last week. The BBA’s figures for the housing market show that mortgage approvals in July were 15% higher than a year ago and house purchases rose 11%.
The CML said that the value of mortgages handed out to first-time buyers and people moving house hit its highest monthly total for seven years in July. Richard Woolhouse, the BBA’s chief economist, said: “Everything that has happened in China this week puts the likelihood of that rise back two to three months. But even if rates do go up in the near future, I don’t think mortgage rates will go up as much and, in any case, this won’t impact much on people’s decision to buy a house.”
Lending stood at an estimated £22bn for the month, an increase of 9% compared with June, and up 14% on the same month last year. He said that people would still do “whatever they can” to get on the housing market in the face of continuing house price rises. Even if they are delayed, rate rises will be small and gradual, rising to 3% over the next five years, he predicted.
The CML said mortgage lending remains on track to hit £209bn for the calendar year, which would mean an increase of 3% on 2014 and represent the highest annual lending since 2008. “Even if rates go up faster than expected I don’t think that would affect the housing market. The fact is that price rises are being driven by a shortage of housing and demand outstripping supply,” he said.