Interesting from today's FPC record: the recent rise in mortgage rates reflects lenders facing higher funding costs rather than wider spreads.
So far at least, it's not a classic credit crunch for mortgagors - just an unwelcome repricing for those looking to take out a loan (inc. yours truly!)
Starter Deposit: a government loan of up to 5% on a first home - not limited to new builds, no buyer deposit required, price caps low. Those without savings, paying more in rent than they would on a mortgage, could save £2,600 a year through this scheme. 👇 buff.ly/0OaFqsX
So what *would* help?
Long term: build more homes. It’s the only sustainable route to affordability.
Short term: A highly targeted Starter Deposit scheme for the 1.1m who could afford repayments but lack savings.
Second, there's a good chance it wouldn't even help. Inelastic housing supply in the UK means that more credit = higher house prices, not more homeownership.
Some say the answer is looser mortgage regulation. We say no for two reasons.
First, this would increase financial stability risks. As per the chart below, FTBs are already spending a historically large share of their income on mortgage repayments.
Why? Because house prices have outpaced earnings for decades. A typical buyer needs to save 5% of their income (after tax & housing) for 5 years for a 5 per cent deposit. 1.7 million would have to save for more than a decade. No wonder a third of FTBs get help from their parents.
Almost half of potential buyers have a high enough income to pass the banks tests for a mortgage, but only 15% have the savings for even a 5% deposit.
We've identified 8.3 million potential first time buyer families and tested whether they can access a mortgage for a starter home in their region.
They face three hurdles:
• a 5% deposit
• loan to income limits
• affordability stress tests
The deposit now presents the biggest barrier.
🏠 New report out today from me, @jamessmithrf.bsky.social and Hannah Aldridge 🏠
We dig into whether financial regulation is holding back young people’s dreams of owning a home — and what policymakers should actually do to help 🧵⤵️ buff.ly/0OaFqsX
The MPC's 5-4 split today continued a rising tide of dissenting votes from internal BoE members.
Last year, one-in-five votes cast by internals went against the majority decision - the highest rate of internal dissent since 2005.
This is good! A sign of active debate among the committee.
The dovish surprise in today’s vote – with 4 members voting for a cut, rather than the expected 2 – signals an increased chance of future cuts. The dovish case is clear in the forecasts too (see charts ⬇️).
If these signs of weakness continue, the case for more rate cuts will only grow.
What does all this mean for interest rates?
Since the MPC’s last meeting, markets have raised and then scaled-back their expectations for rate cuts this year. Nearly two cuts were priced in around mid-January. But in recent days the odds of a second cut were around half.
In the long run, real wage growth can only be sustained if productivity is growing too.
Here, the Bank still expects a gradual recovery in productivity growth. Looking ahead, it appears marginally more optimistic than the OBR – but note that the OBR thinks potential output is higher today.
Unchanged wage growth + less inflation = stronger real wages.
The Bank projects more than twice as much real pay growth in the next three years (3.5%) as the OBR does over the next five (1.6%). If the Bank is right, that's a much rosier outlook for living standards.
The backdrop here is pay growth appearing to settle around 3% in recent data - traditionally a level consistent with 2% inflation target. If it holds, it should give space for quicker cuts. Indeed, the two surprise voters for a cut (Breeden & Ramsden) both cited this in their reasoning.
On wage growth, the Bank’s near-term forecast for private-sector regular pay is basically unchanged in the near term: it still sees AWE easing to around 3.2% by the second quarter of this year.
The Q2 drop in inflation is mainly an energy story, but there also been some broader good news here. Services inflation – a key measure of domestically generated price pressure – has been consistently lower than previously forecasted, and this weakness is projected to continue.
Lower wholesale prices and cost-of-living support mean that energy bills will be pulling down headline inflation from April.
Inflation is forecast to be back at 2% by June - nearly a year earlier than previously thought.
Look, I know there's a lot going on in the news right now. But the MPC decision today was actually quite interesting!
They were only one vote away from delivering a cut that wasn't on the cards at all, and they now think inflation will not just drop sharply this year but stay low.
Thread below ⤵️
The MPC delivers a bit of a dovish surprise, holding Bank Rate at 3.75% only by a narrow 5-4 margin. Markets were expecting a clear-cut 7-2 vote.
There will be lots of unpack on the Bank’s latest outlook for the economy and the future path of interest rates.
As interest rates fall, why is Britain’s average mortgage bill set to keep rising in 2026?
In our latest Substack, @simonpittaway.bsky.social unpacks the weirdness of this interest rate cycle. ⬇️
buff.ly/EEQ99bZ
Very kind, thank you!
And you can also tune in to hear me discuss this work (and much more I'm sure) with @jasonfurman.bsky.social
and the Bank of England's Clare Lombardelli at our event this afternoon.
www.resolutionfoundation.org/events/a-lea...
For much more on all of this see the report published this morning.
www.resolutionfoundation.org/publications...
🏢 Dynamism: non-residential Stamp Duty is a tax on business reallocation and badly needs reforming. Reforms could be funded by cutting the VAT registration threshold to £30k, which would raise £1.5bn+ and remove a disincentive for small firms to grow.
🌐 Innovation: free trade boosts innovation by exposing domestic businesses to ideas from aboard and increasing the potential rewards from innovating. The imposition of tariffs by the US underscore the need to pursue trade agreements elsewhere.
💷 Investment: the government should bring software in scope of full expensing - allowing businesses to offset their investment against their tax bills, as they already can with lots of physical investment.
The lessons for policy are clear: we need to raise business investment, boost innovation and reverse the long-run decline in business dynamism. Of course, none of these are directly under policy makers’ control, but there are things we can do to shift the odds in our favour.
Finally, another potential explanation for the strength of US services is an uptick in business dynamism. Covid shook up the US economy in a big way, and there has been a long-lived uptick in labour reallocation and business formation – which hasn’t been matched in Britain.
Look at the type of investment, tech adoption seems to play a major role. Either side of the pandemic, American businesses increased spending on software twice as quickly as their British counterparts. We see a similar pattern in related investments like ICT and R&D.