Mortgage rates are at the mercy of coronavirus

A cut in the base rate could have a damaging effect on the housing market, says Alexander. Picture: Laurence Winram

The particular events Macmillan was referring to were unpredictable and hugely consequential – the type that comes round a bend without warning and hits you like an express train.

Coincidentally the first week of 2020 brought one such “event”: the assassination, in Baghdad, by the US of a senior Iranian general which, apart from making most of us feel a little less safe, spooked the world’s financial markets. But the unexpected and very sudden rise in cases of the coronavirus during February is now beginning to make the Baghdad occurrence look like a little local difficulty in comparison.

Understandably, the main coverage of the virus has been focused on the threat to people’s health and, in some cases, lives. But running at a close second is the serious debilitating effect on stock markets, with the Footsie last Friday having plunged to its lowest level since the banking crisis of 2008.

As a child of the 1960s I obviously have little recollection of politics and economics during that decade but I am aware that back then a crisis like the coronavirus would have led to an instant surge in interest rates.

Topsy turvy

Now the world appears upside down, with calls already being made in some quarters for a cut as a means of limiting the harm to the global economy.

Low interest rates are common across the world, the principal aim being to stimulate the relevant national economies. But in the UK they are also related to our high number of home-owners, for whom more historical rate levels could make their mortgages unaffordable and at the same time push many into negative equity because of the resultant dampening of values.

It seems almost incredible to recall that the base rate, currently 0.75 per cent, stood at 5.75 per cent in November 2007, just as the banking crisis was starting to emerge on the horizon. It is likely to take many years before interest rates return to “normal” (ie pre-banking crisis) levels and any rise will need to be gradual and cautious to protect the generation of recent buyers unaccustomed to high-cost mortgages (rate swings of between 10 and 15 per cent were common in the 1980s).

Whatever a cut in the current base rate might do for the economy, I worry that any effect on the housing market would be, at best, neutral and at worst damaging. It’s a basic fact of life that the lower the interest rate the more likely some people are to bid more for a house than they might otherwise have done or to take on commitments that they might not be able to afford later on.

In other words it can give an unnatural and, sometimes, unsustainable stimulus to the market (it has, for example, been shown that the government’s Help to Buy scheme actually directly boosted prices in some quarters).

It is worth noting too that the decision to raise base rate from 0.25 per cent to 0.5 per cent in November 2017 and to 0.75 per cent in September 2018 did not do any harm to the property market – as the robust number of completions in December last year proved.

And let’s not forget savers, who once provided all that mortgage money until the government indulged in an orgy of printing money (euphemistically called “quantitative easing”) which left lenders awash with cash and, therefore, without the same need to woo savers, leading to the current derisory returns on deposit accounts.

It is these returns that prompted even cautious small investors to become “reluctant landlords” as property was seen as a relatively safe, and more profitable, alternative to savings. If the base rate is cut back to 25 per cent then more may be tempted to try buy-to-let – competition which first-time buyers, in particular, could do without.

- David Alexander is MD of DJ Alexander

Mortgage rates are at the mercy of coronavirus - David Alexander