economic #aGENda 09.03

Our regular roundup of financial news from the last two weeks that's driving the economy

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Households feel the inflation squeeze

UK household incomes are on course to collapse by the most since the mid-1970s after Russia’s invasion of Ukraine sent energy prices soaring to new highs.

The dramatic increase in global oil and gas prices is forecast to push UK inflation above 8% this spring, causing average incomes across Britain to fall by 4% in the coming financial year – a hit worth £1,000 per household, the biggest annual decline since 1975.

Inflation in the UK was already at 5.5% – the highest rate for 30 years – before Vladimir Putin ordered his troops into Ukraine. Now economists are warning that the conflict’s impact on global oil and gas prices will add to inflationary pressures around the world.

Although the UK sources relatively little of its gas supply from Russia – about 5% of its total imports – fears over supply restrictions amid the escalating conflict have driven up global wholesale prices. Oil prices surged to $139 a barrel on Monday before falling back to about $125. UK gas prices rose to 800p a therm* before falling to about 600p – still almost triple the price at the start of February.

Think Tank, Resolution Foundation said UK inflation could therefore peak at 8.3% this spring, or even exceed the 8.4% rate of April 1991, which was the highest level for the measure of the increasing cost of living since 1982.

* A therm is a unit of heat energy equal to 100,000 British thermal units

Bank of England mulls ending post credit crunch rules

Tough rules brought in during 2014 to restrict the amount mortgage applicants could borrow may be reversed following a review by the Bank of England.

After the credit crunch and global financial crash in 2007 and 2008, precipitated by mortgage lenders approving millions of loans to borrowers with no ability to repay them, the Financial Conduct Authority introduced strict rules governing how lenders assessed mortgage applications.

Instead of lending borrowers a multiple of their annual salary, mortgage lenders had to consider the applicant’s income, expenses and base the amount they would lend on the difference. Known as “affordability assessments”, borrowers also have to be able to show they could afford their mortgage repayments.

Further rules from the Bank of England force lenders to “stress” this affordability should their mortgage rate be 3% more than its standard variable rate for two-year fixed rates. The change drastically reduced the amount people could “afford” to borrow if taking a fixed term deal for fewer than five years, after which the 3% “stress test” does not apply.

Now the Bank of England believes the affordability stress test could be removed completely without jeopardising the economy’s stability, meaning lenders could go back to lending to borrowers based on income multiples. Letting people borrow more money looks like a risky move at a time when house prices are sky-high (see below) and the outlook is uncertain.

But the Bank is convinced the extra test isn’t fair anymore, and that without it, there are still enough protections in place.

Banks pull mortgage deals

Nervous lenders have pulled more than 500 mortgages from the market in the past month, pushing up prices and leaving borrowers with increasingly expensive loans just as they face rampant inflation, rising taxes and higher energy bills.

The number of deals borrowers can choose from plummeted from 5,356 at the beginning of February to 4,838 this week, according to Moneyfacts, an analyst. This was the largest drop since May 2020 – when banks were preparing for economic mayhem and house sales had come to a halt due to the pandemic.

The advent of fewer deals has forced up the average rate charged on "variable" mortgages by 0.15 percentage points in the past month – the largest single increase ever recorded by Moneyfacts. Hopeful homebuyers now only have four weeks to secure a deal before a lender replaces it with a higher charge, the data showed.

In February a borrower could mull their options for six weeks on average. Commentators have observed that banks are on the defensive, just as they were in 2020, given the economic outlook was fraught with uncertainty. As such, lenders are withdrawing deals on a daily basis and the frenzied nature of the market means customers are being forced to make snap decisions.

The pace at which deals are withdrawn is leaving borrowers with little time to react. They might discuss a rate with a lender only to call back a day later and find out it's gone. The vast majority of mortgages have gone up in price in the past month amid banks reluctance to compete and sell loans.

Lenders have also braced for more interest rate rises by the Bank of England. The average two-year fixed loan was 0.21 percentage points more expensive, charging 2.65%, the highest since November 2015. A five-year deal now carried 2.88% interest, some 0.17 percentage points more expensive than a month ago.

House prices continue to surge

It seems that not a single economic aGENda goes out without a reference to a further increase in house prices as the UK house market shows no signs of cooling down. Prices are rising at their fastest rate since 2007, according to the Halifax’s latest House Price Index.

Year-on-year prices grew by 10.8%, representing the fastest pace of annual growth in a decade-and-a-half and pushing the average house price up to a record high of £278,123.

The report revealed that it was the biggest one-year cash rise recorded in almost 40 years of index history for average house prices. The February report also found that monthly house price growth rose to +0.5% (or £1,478 in cash terms) following a slower start to the year, while adding that the squeeze on household finances was “still expected to weigh on the market this year”.

February was also the eighth month in a row that property values had increased, prompting Halifax to describe the market as resilient, and that it showed “little sign of easing”. The report added that two years on from the start of the pandemic, average property values have now risen by £38,709 (+16%) since February 2020.

Over the last 12 months alone house prices have gained on average £27,215. This is the biggest one-year cash rise recorded in over 39 years of index history. The report identified a lack of supply as one of the main reasons, noting that the “dearth of new properties” being listed had become a long-term trend.

The market’s buoyance is in stark contrast with the squeeze on household finances, caused by soaring inflation, rising rates and looming tax increases.

Investors flee market carnage

Finally, London’s blue-chip stocks endured their worst week since the start of the first lockdown last week as investors pulled their money out of equities amid the continuing economic chaos caused by Russia’s invasion of Ukraine.

The FTSE 100, home to Britain’s biggest listed companies, fell another 251.71 points, or 3.5%, to a five- month low of 6,987.14 last week, taking its losses for the week to 6.7%. Not since March 2020, when it fell by 17%, has the Footsie suffered a bigger weekly loss. This left the index 7.3% below where it was in February 2020, just before the pandemic first rattled global stock markets.