Don't bank on QE lifeline for mortgages
A fresh bout of quantitative easing may alleviate concerns about the broader economy but it is unlikely to provide a significant boost to the mortgage market, experts warn.
The Bank of England revealed plans to inject a further £75bn into the economy through QE earlier this month, adding to the £200bn it has already made available since March 2009.
QE allows the BoE to create new money electronically to buy assets such as Government and corporate bonds and supply fresh capital to an ailing economy.
Industry consultant Jonathan Cornell says: “QE in an ideal world would mean banks have more money to lend and more people are able to get mortgages but we are a long way from a normal economic environment.
“QE is occurring when interbank lending is drying up because banks are paranoid about exposure to Europe. The theory is it should expand lending but banks are not willing to lend to each other, so the effects will be cancelled out. Once the banks pay off the special liquidity scheme, it will start to make things slightly easier in terms of freeing up capital to lend.”
Home Funding chief executive Tony Ward says: “The problems relating to the mortgage market are to do with the deleveraging of banks and the fact they are trying to increase their capital ratios. There is not a lot of capital being supplied to the market from banks as it is sitting on their balance sheets. Add to that the fact that consumer confidence is low and people do not want to borrow and you have a very tough market with problems that cannot be solved with QE.”
According to Cicero Consulting director Iain Anderson, it is hard to find any hard evidence that QE will increase gross mortgage lending.
He says: “The question is, can the Bank of England point to tangible, real economic effects from QE, for businesses, borrowers and savers? We can point to positives in terms of companies feeling better capitalised but it is impossible to see whether it is benefiting the mortgage market.”
When the announcement was first made, some market commentators suggested the price of long-term fixed rates could fall if the BoE concentrates its asset buying on long-term bonds, as it did with previous rounds of QE.
But John Charcol senior technical manager Ray Boulger believes this is unlikely. He says: “The immediate reaction to the QE announcement was quite a big fall in gilt yields, particularly at the long end.
“The yield curve had been narrowing over the previous few days and that looked set to continue but by close of play on that day, most of the falls in yields had been wiped out and there has not been much change since.”
If I Were You managing director Rob Clifford believes a fall in fixed-rate pricing would not have benefited the market as people are reluctant to fix their mortgage while there is little indication that the base rate will rise in the near future.
He says: “It could potentially have an effect on fixed-rate pricing on mid to longer-term products but I do not think that will have an impact on business volumes. Consumers are not interested in fixed rates, given their belief that base rate increases are unlikely in the short term.
“I do not believe QE will create any direct boost in the mortgage market. Borrowers are worried about job security and the impetus to change mortgage has receded considerably. It is good for the broader economy but I do not think there is any direct correlation to improvements in the mortgage market.”
Cornell says recent price cuts in the mortgage market have been driven by increased competition rather than funding costs.
He says: “The pricing of products used to be fairly correlated with the price of funding the lending in the first place but when we started to have misery in the mortgage market, it broke that correlation.
“Most of the recent price movements have been down to competition rather than funding costs. QE should make mortgages cheaper in a normal market but I do not think we will see the price of mortgages radically change as a result of QE.”