The interest rate environment is the 'number one' driver for the housing sector
The UK housing market remains ‘incredibly resilient’, according to former Bank of England economist, Rob Thomas (pictured), who believes last week’s interest rate cut to be more impactful for the mortgage sector than the tariff war which erupted in the days after Donald Trump’s so-called Liberation Day.
“China and the US are backing down on very high tariffs, and where we're sitting now, it doesn't look like there's going to be a full scale trade war, which would have been quite damaging to the broader economy,” Thomas told Mortgage Introducer. “The other big player is the EU, but I can't see them deciding to retaliate to what Trump's done, any more than anyone else has. Interest rates is always the number one driver of the domestic housing market - even a quarter point cut is significant, compared to the amount of trade we do with the US.”
He continued: “In terms of GDP impacts on households, it's not actually that huge - UK exports to the US are about 2% of GDP. There may be a small reduction in UK exports to the US, but based on the 10% tariff across the board, that’s not enough to move the dial in terms of UK economic activity and certainly not compared to the interest rate environment - that's a far more important driver of the housing mortgage market and a more important driver for the economy generally.”
Thomas, who is a respected industry analyst and researches the market for the Intermediary Mortgages Lenders Association (IMLA), questions the Bank of England’s approach to the interest rate. “My view is actually maybe a minority one, but I find what the Bank is doing is surprising,” he commented. “I'd even go so far as to say I don't really feel that they're actually targeting 2% inflation anymore. If you look at the number one variable as a guide to future inflation it’s wage increases, and they're still running at over 5.5% or more, particularly unit labour costs. And when you’ve got no productivity growth in the economy, then your unit labour costs - that is costs per unit of output - will be roughly growing in line with wage rates. If workers aren't producing any more and their wages are rising at between five and six per cent a year, where wages are rising now and have been for quite some time, it is not compatible with the two per cent inflation target.”
Wage rises will not fall back as quickly as the Bank and the Office for Budget Responsibility expected, believes Thomas. “There's always this trade-off between prices and growth,” he reasoned. “Sometimes you have to inject a little bit of pain into the economy. They don't seem to be prepared to do it. I don't see that they can get back to 2% inflation within 18 months to two years. I feel that the Bank of England are more focused on output, and less focused on inflation. They seem to be far more focused on concerns about growth.”
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Will target inflation be met?
In the current economy, Thomas believes the UK could end up in a semi-permanent period of higher inflation, rather than target inflation. “That's not a disaster for the economy, but it's not in line with the Bank of England's remit of hitting 2% inflation,” he explained. “So, the bottom line for me is interest rates. I wouldn't have been putting them down if I'd been on the Monetary Policy Committee because the figures that they're looking at in terms of what’s driving inflation don't justify a fall in interest rates.”
Thomas acknowledges that this goes against many brokers’ desire for rate cut after rate cut. “They always will, won't they, who wouldn't?” he said. “You've had COVID, and then you had the Russian invasion of Ukraine and the spike in inflation, and you had the Liz Truss issue. You've had all these shocks, and Liz Truss in some ways was the worst, because that was the one, of course, that pushed fixed rates up very quickly back in 2022. The housing market is incredibly resilient to all of this.”
He added: “Everyone in the housing mortgage market will want a rate cut, because it's always going to be better for the housing and mortgage market if rates are lower. If rates are going to go down, that means that the housing and mortgage markets are likely to remain robust and possibly even pick up a little bit more towards the end of the year, because there is talk of further rate cuts and you could see a base rate of around 3.5%. That's going to lead to some fairly good mortgage rate cuts and help the market. There's no doubt about that.”
While the threat of an all-out tariff war may have eased for now, Thomas is less than convinced by the UK-US trade deal, hailed by the Government. “It seems pretty clear that the thing they were really worried about was car exports,” he said. “That's the thing that was really keeping the government awake at night because companies like Jaguar Land Rover were going to have to start cutting staff. So, they've managed to prevent that big negative from happening. But other than that, it was an unimpressive deal. The fact there's actually a 100,000 cap on car exports at this lower rate of 10% is really, I think, quite disappointing because we already export 100,000 cars a year to the US, so it doesn't really allow for any growth. Donald Trump's strategy is proving to be effective, whether we like him or not. So the deal was good for America because it leaves them in a much better position than they were with the UK before Liberation Day. Arguably, we had to capitulate. It doesn't leave a good taste in the mouth, having to take the worst deal from a trading partner that you used to see as a trusted partner.”
Bob Pannell, an economist and respected analyst of housing and mortgage markets, with 30 years' experience in financial services, agrees that the Bank of England’s rate cut is more impactful for the industry than tariffs – at least for now. “Very short-term, the BoE rate is more significant,” Pannell said. “Longer-term, beyond the next few weeks - it is undoubtedly about what happens to tariffs and trade. Fundamentally, the state of plumbing of the global trade system determines economic growth and inflation prospects, especially in an open economy like the UK.”
