The rise of the long-term mortgage 

The rise of the long-term mortgage 

In many respects the UK economy has proved surprisingly resilient in the face of the big shocks of the last decade and a half – everything from the financial crisis to Brexit, the pandemic and the 2022 energy shock. Barring the short-lived contraction at the onset of the pandemic, the UK has not faced a serious recession for 15 years. House prices have risen 26% since January 2019 and today stand at their highest levels, according to the Halifax.

• Even adjusting for the surge in CPI inflation in the last three years house prices have done relatively well. The peak-to-trough decline in inflation-adjusted house prices, between March 2022 and September 2023, was 12%, far less than the decline seen in the recessions of 1990-92 and 2007-09. In real terms house prices are much higher today than has been the case for most of the last 20, or, indeed, 50 years.

• Elevated house prices have pervasive effects. First-time buyers (FTBs) are older, fewer in number and require more capital than in the past. According to real estate firm CBRE, the average FTB deposit has risen from 60% to 120% of average income since 2002.

• Homebuyers are not only contending with high house prices. In the wake of the financial crisis, regulators toughened the rules governing mortgage lending that has constrained the supply of mortgages. The sharp rise in mortgage rates since 2022 has made it even harder to get on the housing ladder. The prevalence of fixed-rate mortgages means that many households who took out mortgages before interest rates rose from 2021 have yet to face the full effect of higher mortgage costs.

• Unsurprisingly, homeownership is in decline. There are two million fewer owner-occupiers with mortgages today than 20 years ago. Those who can get into the housing market are increasingly doing so by taking out longer-term mortgages to reduce their monthly payments. 25-year mortgages were once the norm but now the proportion of borrowers taking out new mortgages with terms of 30 years or longer has risen from 12% in 2005 to 50%. New mortgages with terms of 40 years or more now account for just under 10% of new mortgage lending, up from less than 1% in 2005.

• Most FTBs are taking out mortgages with longer terms, but this phenomenon is not confined to first-time buyers. UK Finance, the body that represents the UK banking and finance sector, reports that an increasing number of current mortgage holders are opting for longer mortgage terms as they trade up in the housing market.

• A sustained improvement in housing affordability – perhaps because of an increase in housebuilding or a return to lower interest rates – could see homeowners switching back towards 25-year mortgages. But if things stay as they are housing will remain expensive and the drift towards longer mortgage terms is likely to continue.

• This would have significant economic and social effects. The average FTB in England today is aged 33. Many could be making mortgage payments into their mid and late sixties, ten years later than the previous generation who bought in the 1980s and 1990s. 

• As housing prices have risen, FTBs have grown older and require larger deposits. Many are taking mortgages with terms of 30, 35 or even 40 years, suggesting that FTBs will be paying off mortgages for several more years than their parents. Against this backdrop the increase in early retirement among 50- and 60-year-olds seen in the wake of the pandemic looks like an aberration. High property prices point to longer, not shorter, working lives.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 0.1% at 8,064. 

Economics

• US inflation rose to 2.6% in the year to October, up from 2.4% in September
• Fed chair Jay Powell indicated a gradual easing of US monetary policy, saying “the economy is not sending any signals that we need to be in a hurry to lower rates”
• UK GDP increased 0.1% in the third quarter compared with the previous quarter, below expectations and down from the strong growth seen earlier this year. Monthly estimates indicated GDP fell in September by 0.1% compared with the previous month
• UK wage growth slowed to 4.8% in the three months to September compared with the same period last year, the lowest rate since the three months to June 2022, according to official figures
• UK unemployment rose marginally in the third quarter to 4.3%, however estimates are still uncertain due to low response rates to the survey
• The Royal Institution of Chartered Surveyors said it expected UK house price growth to continue to gain momentum. In the rental market, the RICS expects prices to increase due to strong demand and falling numbers of rental properties entering the market 
• UK chancellor Rachel Reeves and governor of the Bank of England Andrew Bailey called for the UK to rebuild ties with the EU, saying “we must reset our relationship” 
• UK chancellor Rachel Reeves announced plans to merge 86 council pension schemes into eight pension “megafunds” in a bid to encourage UK investment
• The UK ranked top of the International Energy Agency’s league table for improving energy efficiency, however this was driven partly by a reduction in manufacturing output and warmer weather reducing the need for households to turn on their heating
• Euro area industrial production fell more than expected in September, by 2% compared with the previous month, driven by falling production in Germany
• German economic sentiment deteriorated in November, according to ZEW, underscoring the country’s continued economic weakness
• The European Commission downgraded its 2025 GDP forecast for the euro area by 0.1 percentage points to 1.3%, driven by downward revisions across Germany, France and Italy
• Ukrainian sovereign bonds rallied this month as some commentators suggested that a potential ceasefire next year may boost Ukraine’s ability to repay its creditors
• European gas prices reached their highest level in a year amid concerns of supply disruption from Russia
• Japan’s economy grew 0.2% in the third quarter this year, in line with expectations and supported by growth in consumer spending
• A record 6.5m people moved to OECD countries in 2023, a 10% increase on the previous record of 6m in 2022
• OPEC cut its growth forecast for global oil demand in 2024 for the fourth consecutive month amid weaker demand from China. The growth forecast for 2025 was also revised down

Business

• The European Commission fined Meta €798m, saying that “tying” its Facebook Marketplace classified ads service to its social media platform was in breach of competition rules
• The Times reports that the UK government is preparing to relax quotas for sales of electric vehicles in response to claims that the current rules have “pushed carmakers to crisis point”
• Pharmaceuticals manufacturer AstraZeneca put a £450m investment plan for a new vaccine production factory in the UK under review, saying “we are reviewing the incentives for investment in the UK”. It also announced $3.5bn of capital investment in the US by the end of 2026
• UK health minister Wes Streeting said hospitals will be ranked in league tables, with “turnaround teams” deployed to failing trusts and more spending freedom for top performers, as part of reforms to improve NHS performance
• Marks and Spencer overtook rival Waitrose in grocery market share in October, the first time outside of the Christmas period amid market-leading sales growth, The Telegraph reports
• The air traffic control network failures in August 2023 affected 700,000 passengers and cost up to £100m, according to a report commissioned by the Civil Aviation Authority
• The UK’s Financial Conduct Authority fined Metro Bank £16.7m due to a lack of appropriate systems and controls to adequately monitor transactions for money laundering risks
• The UK approved five electricity cables, costing approximately £7bn, to connect the UK with Ireland and continental Europe
• The UK Post Office is seeking to sell or close 115 of its wholly owned branches as part of a wider strategic review, potentially affecting 1,000 jobs
• The UK’s higher education regulator, the Office for Students, said “bold and transformative action” is required to address financial sustainability of the sector
• The credit rating of UK water company Southern Water was downgraded into junk territory by the credit rating agency Moody’s amid ongoing financial difficulties
• Energy company Shell won an appeal in the Dutch courts against an order to cut greenhouse gas emissions by 45% by 2030, brought about by environmental group Friends of the Earth

Global and political developments

• The US Republican Party retained their majority of the House of Representatives, giving them control of both chambers of Congress
• US president-elect Donald Trump announced Marco Rubio as secretary of state, Matt Gaetz as attorney general, Fox News host Pete Hegseth as defence secretary and tech entrepreneur Elon Musk as co-leader of the new Department of Government Efficiency
• Experts, including former UN secretary-general Ban Ki-moon, have called for an overhaul of the COP climate talks, saying “COP must shift away from negotiations to the delivery of concrete action”
• German elections will take place next February after the current coalition of three parties collapsed
• The Labour Party lost 24 of the 58 council seats it defended in local council by-elections since the Party came to power in July this year, according to research by analyst David Cowling

And finally… a political activist pretending to be an official from Vladimir Putin’s party tricked Russian school teachers into making and wearing tinfoil “helmets of the fatherland” hats which would supposedly protect against “hostile radiation from NATO satellites” – Pu-tin foiled