Is the mortgage market about to take a further hit?
The UK mortgage market has reeled in recent weeks from the war in Iran, with interest rates soaring and lenders withdrawing products – and wider consumer sentiment is also sinking as pessimism about the economy grows.
British consumers now view the economic outlook more negatively than at any time in the past 11 months, according to GfK’s consumer confidence index, amid rising fears about higher inflation and energy prices because of the conflict in the Middle East.
In March, that gauge dipped to -21 compared with -19 in February, signalling that the conflict – which erupted at the end of last month – is negatively impacting consumers’ feelings about the economy.
The war has spiked energy prices and sent bond yields and borrowing costs higher, adding further gloom to an economic outlook that had already soured in the UK.
“People simply do not feel the economy is robust enough to ride out the knock-on effects from the Middle East conflict,” said Neil Bellamy, consumer insights director at GfK.
Homebuying outlook also takes a hit
The war may also have dashed hopes for a UK housing market rebound this year. Expectations of Bank of England interest rate hikes in the months ahead have risen, even though some observers – including the central bank’s former chief economist – believe increasing rates would be the wrong move.
The average mortgage rate has jumped to its highest level for 18 months, surging as major lenders continue to bump their prices amid ongoing bond market volatility.
For homebuyers and mortgage shoppers, that’s grim news: the typical annual cost of borrowing £250,000 over 25 years has now increased by over £1,075 in under a month, according to price comparison website Moneyfacts.
Meanwhile, inflation held steady at 3% last month but is expected to surge when the impact of the conflict begins to seep into that measure, potentially cutting into homebuyers’ budgets and complicating the BoE’s outlook.
UK home prices are also expected to rise at a slower pace than previously anticipated. Analysts are lowering their projections, according to a Reuters survey, because rate cuts are now viewed as a much more distant short-term possibility than before.
Conflict de-escalation essential to salvage consumer confidence
For the economy, Bellamy said much will depend on whether the US and Iran can reach a quick end to the war, even though that appears a distant prospect at present.
US president Donald Trump has extended a pause on bombing Iranian energy facilities until April 6, but Iran has rubbished claims that it’s negotiating with the US on a mutual ceasefire.
A long-lasting war could have potentially devastating consequences for UK consumer confidence, Bellamy said – spelling possible further trouble ahead for the housing and mortgage outlooks too.
“Unless there’s a swift resolution to the conflict, or government schemes such as additional support with energy bills… this ripple of fear we are seeing in the March data has the danger of turning into a flood,” he said.
