Peak uncertainty for interest rates
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
Market uncertainty
Reverberations from Friday's 'mini' budget have continued since Monday's note. Mortgage lenders, unable to price products with confidence, pulled large chunks of their ranges off the market. Bets on the trajectory of the Bank of England's base rate have at times suggested a peak of more than 6%.
There is little doubt that mortgage costs will now rise faster than they would otherwise have done. As Tom Bill told the Telegraph on Monday, the impact of these higher mortgage costs is going to eclipse that stamp duty cut quite quickly and we do expect firm downward pressure on prices next year.
However, whether or not the trajectory of interest rates will be as steep as the market-implied path is a source of huge uncertainty right now. During the post-pandemic inflationary surge, the BoE has hinted at the market's tendency to overshoot its bets on the path of the base rate - though you'd be right in pointing out those bets now look tame in light of what we've seen since.
Anyway, Capital Economics estimates the bank rate could peak at 5% next year. Nomura suggests the MPC won't hike beyond 4.5%. Pantheon Macroeconomics pegs the peak at 4%. Those are from this column by the FT's Chris Giles. Huw Pill, the BoE's chief economist and member of the MPC, said we're likely to see a significant hike in November.
We will wait for the dust to settle slightly before publishing new forecasts for house prices in the next few days.
A lot is happening in November
It's fair to say the mini-budget has some influential critics: “Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture,” the International Monetary Fund said yesterday. “It is important that fiscal policy does not work at cross purposes to monetary policy.”
Moody's was critical, as was former US Treasury Secretary Larry Summers, hedge fund manager Ray Dalio, and so on...
Recognising the need to steady the ship, the Treasury released a statement in the wake of those IMF comments confirming that the government will set out a "Medium-Term Fiscal Plan" on November 23rd, alongside growth and borrowing forecasts from the Office for Budget Responsibility. That plan, according to the statement, will set out further details as to how debt falls as a share of GDP over the medium term.
For more on the mini-budget, you can find our residential development-focussed view here, our rural take here and a broader view on the business and commercial property implications here.
Currency discounts widen
The pound fell to US$1.03 in early trading on Monday morning before recovering to US$1.07. The exchange has fallen from US$1.71 at the start of July 2014.
We talked last week about the currency discounts driving activity in the London property market. We have now updated those in light of the subsequent fall in sterling and the results highlight the substantial size of the relative discount for US buyers and those denominated in pegged currencies such as the Hong Kong Dollar and currencies in many parts in the Middle East.
Currency is only part of the story, however. Property prices have also fallen due to political uncertainty, tax hikes and international travel restrictions. Average prices in prime central London fell 13% over the same eight-year period.
The largest discount can now be found in Knightsbridge, an area of the capital where prices are still 24% below their 2014 level. Combined with the currency movement, a US buyer would have benefitted from an effective discount of 53% this week compared to July 2014.
China falls behind
China's economic growth will fall behind the rest of Asia this year for the first time since 1990, according to new growth forecasts from the World Bank.
Growth in developing East Asia and the Pacific outside of China is forecast to accelerate to 5.3% in 2022, while growth in China is projected to hit 2.8%, a sharp deceleration from 8.1% in 2021.
Slowing in China will drag down growth globally. China constitutes a whopping 86% of Asia's output, which neatly illustrates why the escalating slowdown in the real estate sector is so important. Real estate, in turn, accounts for almost a third of China's GDP.
In other news...
Heathrow’s status hit by ‘long Covid’ (Times), and finally, consumers feel the squeeze after record food price increases (Times).