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Mortgage rates and the housing market

Chief executive of Worldwide Financial Planning, Peter McGahan's latest column

Peter McGahan, chief executive of Worldwide Financial Planning(Image: © Richard Trainor)

Last week I covered the reality around interest rates and where they are going, as highlighted by the market makers, rather than what the Central Bank was saying. I have also done this on numerous occasions over the last 18 months. It’s still going that way.

The impact of the headlines has many destabilising factors, most notably of course our ability to plan ahead, and to buy or sell a home. You’ll be familiar with fight or flight, or of course the other option, freeze.

With confusion and worry (better described as negative imagination), it’s not that difficult for society to develop a ‘wait and see’ attitude, which could inevitably dry up supply, or demand, which creates the self-fulfilling prophecy of: The housing market will slow. And it did.

And so, sellers think they won’t get what they need for their home, so they don’t bother trying to find out (i.e. putting it up for sale). Buyers become worried about house prices falling so they don’t make an offer. That rusty negative feedback loop develops pretty quickly.

The drivers of this are a lack of understanding of the key points of last week’s column and what causes rates to rise and fall. Hopefully last week covered that.

If I look at the live rates on my screen, the market makers are clear in that two- year swap rates are below five per cent (4.74% to be accurate). To understand that, this does not mean that the rate in two years will be 4.74%. That is the average rate over the two-year period. While they might be wrong about the future, that’s the basis on which rates are currently being manufactured to be sold to the public, not what the current Bank of England (BOE) rate is.

So, if rates are not expected to drop until August (which is what they are saying), to achieve an average rate of 4.74%, rates will have to drop sharper at some point. Either way, the market makers are saying ‘they are falling’. It is only when something stronger comes from the BOE, (normally with their press office briefing material), that journalists will respond, that sends a strong message out, and hey presto, you have a buyer’s market again.

Is it sensible to mess around trying to time that market? No.