Housing
What does the economic uncertainty mean for house prices?
House prices are likely to fall next year but it is not yet clear by how much. Credit Suisse warned there could be a drop of between 10% and 15% next year, while Graham Cox of Self Employed Mortgage Hub predicts a 20% decline over two to three years.
Are rents going to increase as well?
Rents have already started to increase and are expected to climb higher in the coming months, as a result of a shortage of housing in cities, such as London and Manchester, rather than – as yet – a direct impact of rising mortgage rates. However, if would-be buyers continue renting because they can’t get on to the housing ladder, this extra demand could put further pressure on private rental prices.
Landlords may also be forced to move out of London and the south-east, where mortgage rates are higher than yields, to invest in properties further north, which could drive up rental price growth in the capital, David Fell, senior analyst at Hamptons, says.
Should I wait to buy?
Buyers who have secured a cheap mortgage are likely to press ahead with the move, even though there is a risk that house prices will fall in 2023. Those who haven’t secured a mortgage could pause for a while, says Richard Donnell, executive director of research and insight at Zoopla. “If we see the political environment become calmer, mortgage rates could fall back quite quickly, but not to the levels we saw last year – 2% mortgage rates are going to be a thing of the past,” he says.
What is likely to happen to mortgage rates?
Hopes that calmer market conditions will prompt lower lower rates have not materialised so far and the Bank of England’s chief economist has said he sees the need for a “significant” rate rise in November. David Hollingworth, of broker L&C Mortgages, says even if the mortgage providers are reassured in the near future by the new chancellor, it may take time to show in rates. “We continue to see lenders withdraw products with little notice, replacing them with higher rates in an effort to stem the flow of new applications.”
Pensions
When we hear pensions are in turmoil, which pensions do they mean?
The Bank of England deployed billions of pounds to buy government bonds in an attempt to calm things down after the mini-budget triggered panic selling by pension funds – but it refers to a particular type of pension. “Defined benefit” – or “final salary” – pension funds that have been making use of a pension investment strategy known as liability-driven investing (LDI).
It doesn’t mean the state pension. And it doesn’t mean “defined contribution” – or money purchase – pension schemes. Most workplace pension schemes and all personal pension plans are defined contribution schemes.
This particular issue has no bearing on almost all public sector direct benefit pension schemes, the majority of which are “unfunded”, meaning pension income is paid from taxes, not from investments, explains Tom Selby, head of retirement policy at investment platform AJ Bell.
Is my pension safe?
With direct benefit schemes, it is employers that are ultimately responsible for making up any shortfall. “This is a problem for your employer to resolve, not you,” says Sarah Coles, senior personal finance analyst at investment platform Hargreaves Lansdown. Selby adds that “provided the sponsoring employer stays in business, you should receive the pension you were promised”.
Even if the worst happened and an employer did go bust and could no longer support its scheme, the official Pension Protection Fund would step in and pay compensation (either 100% or 90% of the income).
For defined contribution schemes, which put money into things such as shares, bonds, property and cash, markets have been tumbling lately and, says Selby, so those in defined contribution schemes with large holdings of UK government bonds will have seen the value of their funds drop.
Is there any good news?
When interest rates go up, so do pension annuity rates, and they have now reached a 13-year high, which translates into a lot more income in retirement than a year or two ago. An annuity is one of the products you can buy with your accumulated pension pot, and it gives you a regular guaranteed retirement income for the rest of your life, or for a fixed term. At the start of this year, a pot of £100,000 would have bought a 65-year-old a non-increasing annuity income of £4,950 a year, but today it would be around £7,190, says Hargreaves Lansdown.
Savings and investments
Interest rates are up so I’m finally making some money – right?
It should follow that as interest rates go up, so do savings rates, but this is not always the case as lenders fail to pass on the full increase, or take months to do so. It is possible to get 5% interest as Atom bank launched an account paying this last week, but you have to lock your money away for five years to get that rate. Any gains in savings rates should be seen in the context of rising inflation, which is eating away at the value of people’s cash.
What has happened to my stocks and shares ISA? Should I stick with it?
The last year has seen shares dive. “In 2022, there has been nowhere to hide,” says Jason Hollands of Bestinvest. “Both global equities and global bonds have tumbled sharply in tandem.” So should you try and stop losses from a stocks and shares ISA by shifting it elsewhere? It rarely makes sense to panic sell, says Hollands. “While the outlook for the UK economy is tough, don’t confuse the UK stock market with the domestic economy. Around three-quarters of the earnings of FTSE 100 companies are made overseas, much of which is in US dollars and so, as those earnings are converted back into pounds, this should provide a bit of boost.”
