Market insight: Reasons to be cheerful

The schools are back, the weather’s turned, and we now have a date for Rachel Reeves’ first Labour Budget.  

It’s been a busy summer, the stable interest rate has seen more buyers and home movers return to the market, but it’s also been filled with anticipation around what the first Labour government’s budget will include. 

Sir Kier Starmer has warned taxes will have to rise to fill the ’black hole' left by the previous administration. This has led to a period of anticipation as everyone waits to find out what that means. Meanwhile, life goes on, families grow, jobs come and go, and people still need to move house.  

Through September, we have seen the mortgage market pick up, and there’s a feeling of hope for first-time buyers. As a Building Society, our purpose is to support people who want to own their own homes, and the recent change in tone is clear. 

Economically, things are beginning to look more promising. The economy is growing steadily, real wages are increasing, inflation is back to a more sustainable 2% target, and the Bank of England has reduced the base rate once, with another expected later this year. Around three and a half million public sector workers are also set to see their wages rise between 5% and 6%.  

Amongst first-time buyers, there is a bit more optimism. Recognising the need for affordable housing across the country, Labour’s housing secretary, Angela Rayner, has set out a number of bold commitments: 

• 1.5 million new homes to be built in collaboration with developers and local authorities over the next five years. 
• Extra funds to local authorities to support planning departments in delivering these new homes. 
• Stronger powers for local planning departments to push through approvals where developments are needed. 
• Prioritising brownfield development while becoming more realistic about building on green belt land that Labour has categorised as ‘grey belt’. 
• Plans for several new towns to be built. Think tank UK Day One has suggested new urban areas within commutable distances from cities, including Oxford, Bristol, York, and Cambridge.  

According to September’s Moneyfacts report, the average mortgage rates for two- and five-year fixed rate deals have fallen month-on-month, now the lowest rate since Q1 2024. The average two-year fixed rate is 0.36% higher than the five-year equivalent. The two-year fixed rate has now been higher than the five-year equivalent since October 2022. This consistent trend feeds the market expectations for further reductions in the base rate by the Bank of England.  

It’s also important to note the increase in the average mortgage shelf life to 21 days, up from 17 days a month prior. This durability is encouraging, indicating a greater degree of pricing stability in the market.  

Although rate cuts are encouraging, they aren’t enough to bring back a sustainable level of activity in the market on their own. Despite Moneyfacts’ data showing a decrease in the average Standard Variable Rate (SVR) to 7.99% from its peak in November and December 2023, affordability challenges persist. A lower SVR does help improve affordability given that borrowers are being stressed against lower thresholds, but this rate is still relatively high. The upcoming budget is also anticipated to reduce lending support from the Bank of Mum and Dad, requiring lenders to step in and help borrowers facing affordability challenges. 

But there are other options available to offer further support. In April, the Building Societies Association published a report assessing the first-time buyer market entitled “Age-old problems, modern solutions – A roadmap for change”.  The report highlights the growing issue of loan-to-income ratios for first-time buyers, especially in regions with high property values. Recent generations of first-time buyers have needed to borrow much larger multiples of their income than previous generations, yet lenders are subject to a cap on higher loan-to-income multiple lending. 

Regulatory change, albeit time-consuming to deliver, must prioritise first-time buyers. Relaxing the LTI flow limit, specifically for 95% loan-to-value lending, could enhance the volume of lending available to low deposit borrowers on high LTV fixed rate products. 

There is a generation of would-be first-time buyers who need support today and lenders who can help them make that wish a reality. To that end, here at Newcastle, we are taking this responsibility seriously. We are looking at how we can ensure we have the right products and criteria to support first-time buyers, so watch this space for more details.  

It’s clear that as markets evolve, lenders must adapt to deliver on their purpose—to help people own their own homes. It is, after all, what we are all in this market to do.