When we heralded in the year with a similar viewpoint piece in January, we were optimistic that, with the effects of the disastrous autumn mini budget fading in the rear-view mirror, increasing market stability might give us a fighting chance of a better year than many pundits were predicting. 

Three months in, the story remains one of ups and downs. After a few weeks in which market interest rates fell from their scary peaks of quarter four, 2022, we saw swap rates, and with them fixed rates, increase again, by 0.70% following better-than-expected economic data in America and stubbornly high inflation. The rollercoaster continued with swaps heading sharply down again after the collapse of Silicon Valley Bank and Credit Suisse, and an expectation that base rates wouldn’t now rise as far. As we know, what starts in America often makes its way here in short order. Factors like better-than-predicted economic performance across the pond, including lower-than-expected unemployment and higher-than-anticipated consumer spending, looked set to send rates higher but such is the fragility of sentiment that concerns over banks’ liquidity flipped that assumption overnight.  

Nevertheless, signs things were stabilising again somewhat saw the Bank of England raise its base rate once to 4.25% on 24 March to insure against an upward impact on inflation. 

Crystal ball gazing  

What all this volatility in market rates has served to remind us of, though, is that the one certain thing, at the moment, is the impossibility of predicting what might happen next, which is not making brokers’ lives any easier when it comes to trying to advise their clients on whether now is a good time to buy or move, or what interest rate to settle for. 

We think the latest base rate increase could be the last one for this year, depending on how successful the powers-that-be are at bringing inflation back in line  Even if that transpires, though, no-one should hope for a return to the exceptionally low rates we enjoyed for almost two decades, and indeed there are signs even borrowers are adjusting their sights to a new normal where rates sit closer to historic averages of between 4% and 5%. 

Predictions from representatives of the Intermediary Mortgage Lenders Association (IMLA) and the Association of Mortgage Intermediaries (AMI) in a recent podcast from our Growth Series broker information resource, suggested we could see a potential 20% decrease in house purchase activity during 2023 – though this could be counterbalanced by record numbers of product transfers. There could also be a  25% decrease in buy-to-let purchasing activity due to the particular headwinds landlords face from factors like affordability and increasingly-punitive taxation rules. Taking the average of the two bodies’ predictions, gross mortgage lending could total £270 billion this year, down £41 billion on 2022 thanks to a 20 per cent drop in transaction levels. 

All-in-all, while understandable, any borrowers still sitting and waiting to see if, and by how much, interest rates and house prices could yet fall, before taking action, could be best advised to think again, given values are holding up and rates are not following the gentle glide path down that some expected. 

What could affect the direction of interest rates in 2023? 

Inflation is a major factor, of course, and the Bank of England may have no choice but to raise the base rate again if it doesn’t start to come down from its current 10% towards the 2% target by the end of 2024.  However, economists believe inflation peaked at 11.1% in October and will now fall. Falling real earnings growth is expected to depress consumer spending, gas prices have been falling and base effects, i.e., comparing high prices today with high prices a year ago, should all help bring inflation down. 

Sentiment on bank base rate drives swap rates and therefore determines where mortgage costs level out, so it’s our hope we’ll see a continued easing of last year’s concerns which led to large spikes in the first place. 

What does the Spring Budget mean for all this? 

The best we could have hoped for from the Budget this time around was really very little. A steady ship is what the financial industry needs more than anything – no dramatic changing of course, just stable, well-signposted business-as-usual. 

And this is essentially what we got, with a few measures thrown in to help boost the productivity and economic growth the UK now needs to yank it out of the doldrums compared to our rich economy peers like the US, Germany and France which, unlike us, have returned to growth since the COVID-19 pandemic. Changes like extending free childcare to the parents of one and two-year-olds, and pension changes including an increase in the annual tax-free contribution limit from £40,000 to £60,000, were designed to help entice more people back to work. 

We welcome any measures to boost business growth which will help bolster economic confidence and, ultimately, encourage people to jump back into making their biggest purchase of all – new homes. We wouldn’t have wanted to see any more ‘money printing’  other than targeted help for the worst-off – as this would just kick root problems down the road once again and risk increasing inflation further.  

This isn’t really a time to expect the chancellor to do anything dramatic for the housing market either, as there are much bigger economic issues to resolve first. Perhaps more support for first-time buyers would have been beneficial. When the Help to Buy scheme ends on 31 March, it will be the first time in 20 years that there has been no government-backed support for this group who are so vital to keeping the market moving.  

There are positive green shoots emerging such as falling wholesale gas prices, though food costs, which have perhaps the most direct effect on people’s pockets, are still up 18 per cent.  

While figures released by Rightmove in March suggest an unexpected, continued increase in prices, of 0.8%, values could fall slightly over the course of this year, this would be little more than a minor correction, given the 25% growth in values we’ve seen over the past two-and-a-half years 

As we know, affordability continues to be a major hurdle preventing borrowers from buying or remortgaging, given higher rates, and therefore the residential market is still down by around 30 per cent compared to the same time last year. In this environment, we remain committed to doing everything possible to help first-time buyers with lower deposits, as our introduction of our Deposit Unlock scheme for new build loans up to 95% LTV shows.  

What goes around… 

Accord is celebrating its 20th anniversary this year, and we’ve been through various cycles and seen different kinds of challenges emerge and subside many times, which gives us the confidence that things will bounce back again this time, too. 

Whenever there is a crisis, opportunities come out the other side. In this case, brokers can  really drive home the value of advice, which is now greater than ever, and even expand their offering to wider money management support, helping people take a holistic look at their finances and potentially make improvements.  

Brokers can play a unique role in helping consumers come through these turbulent times in the best shape possible, with individualised help which looks at all their circumstances – not just headline rates – and matches them to the options which genuinely best suit their needs. 

There is an argument that brokers’ most important contribution, at least in the short term, could be in advising people to act on what market knowledge is available and certain now, as there is significant risk in making any assumptions or predictions in a market as volatile as the present one. 

Jeremy Duncombe is managing director of Accord Mortgages