The impact of higher mortgage rates
Making sense of the latest trends in property and economics from around the globe
5 minutes to read
Solving the green homes problem, continued...
The government on Monday announced a new round of funding for home insulation under its ECO+ scheme. About 80% of the subsidies will be made available to households with EPCs of D or below and are in the lower council tax bands.
There appears to be recognition within government that subsidies will be crucial if it is to reach the official target for most homes to achieve EPC C by 2035, but the scale of what will be required to do that dwarfs measures currently in place. Bloomberg quotes a government official who acknowledges that the shortfall between spending committed and what is needed is estimated to be in the tens of billions. It's unclear how the government plans to make up the deficit, the official said.
Incentives have long been the problem, though a lack of skilled people able to do the upgrades at scale needs to be addressed too. We recently estimated that the average cost spent improving a dwelling previously rated EPC band D or below to at least a band C is £9,260. Those that carry out the work do see an uplift in the value of their home - our analysis of 30,000 homes that had work carried out in the most recent five years found that moving from an EPC D to a C added an additional 3% in capital value over and above local house price growth, equivalent to £9,003 based on the average resale value. That's fine, and you save money on your energy bills, but is it enough to prompt a massive wave of green upgrades? Almost certainly not (see chart courtesy of Bloomberg).
The Climate Change Committee (CCC), the government's own climate watchdog, produces an annual assessment of the government's progress on cutting emissions. We covered this year's scathing assessment back in July. The report found that there had been "limited progress" on policies to improve the energy efficiency of homes, and though the government has the EPC C target by 2035, "there are no firm policies or consultations in place on how that will be achieved for the majority of housing stock."
The impact of higher mortgage rates
Mortgage approvals for the purchase of homes - a good leading indicator for housing market activity - fell to 59,000 in October, from 66,000 in September. That's now running well below the six month average of around 66,000, according to the Bank of England data out yesterday. Net borrowing fell to £4 billion, from £5.9 billion a month earlier.
Activity was slowing before the mini-budget on September 23rd, but the scale of the drop off in October shows the degree to which rising mortgage rates hit sentiment. The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 25 basis points to 3.09% during the month. Gross repayments surged to £24.8 billion, up from £21.5 the previous month.
Mortgage rates have since eased - five year fixed rate products can be found below 5% - but that's likely as good as it gets, for now at least. Markets now expect the Bank of England to hike the base rate to 3.5% on December 15th with a peak of 4.5% around Spring 2023.
Pivot latest...
Germany, Spain and Belgium all reported slightly lower rates of inflation this week, reinforcing the possibility that peak inflation has arrived. Consumer prices in Germany climbed 11.3% in the year to November, down from 11.6% a month earlier.
We'll get the official inflation reading for the Euro area later today - economists expect a slight moderation. European Central Bank President Christine Lagarde has been managing expectations and any easing in inflation is going to be a protracted process, but sentiment will unquestionably improve rapidly if these readings start improving. There are already tentative signs that consumers are growing more optimistic.
There will be more to pore over from the US during the coming days. The U.S. Bureau of Economic Analysis will tomorrow publish the personal consumption index - the Fed's preferred measure of inflation - then on Friday the Labor Department will publish the latest jobs data.
Granted, any suggestion that rising prices are peaking has to come with a health warning while so many inflationary pressures remain unresolved. Protests spreading through China pose the possibility of another supply-side shock that further complicates the picture for central banks.
Prime forecasts
After two years in which the pandemic fuelled a surge in house prices in most global cities, the landscape is now shifting. Money is becoming more expensive, geopolitics more complex and China is no longer powering the world’s economy.
Prime markets are more insulated to the fallout from higher mortgage costs, but they’re not immune. The transition from a seller’s to a buyer’s market is already underway across most prime residential markets - as we outline in our new forecasts, out this week.
Across the 25 cities tracked, Knight Frank’s global research network now expects prime prices to rise by 2.0% on average in 2023, down from the 2.7% we predicted six months ago. Despite this slowdown, aggregate growth in 2023 would still be higher than that recorded in six of the last ten years across our prime residential markets. Fifteen of the 25 cities – or 60% – still expect prime prices to increase in 2023, down from the 18 (72%) we listed six months ago.
Dubai leads our 25-city forecast for 2023 with price growth expected to reach 13.5%. You can read a more detailed take on Dubai from Faisal Durrani here.
In other news...
Has the UK hit peak housebuilding?
Revealed: what buyers want from ski resort property.
Elsewhere - HMRC chases 5,500 offshore companies for missing property taxes (FT), and finally, adding bacteria can make concrete greener (The Economist).
Image by RachelW1 from Pixabay