More bad news for mortgage rates as inflation surprises again
Making sense of the latest trends in property and economics from around the globe.
3 minutes to read
Hot to the core
The mortgage rate hiking cycle that has gripped the UK housing market over the past month was given a shot of momentum this morning after official inflation figures surpassed expectations.
The UK's Consumer Prices Index rose 8.7% in the year to May, unchanged from April. Core CPI, the number that spooked markets last month and excludes volatile aspects like energy, food, alcohol and tobacco, rose again to 7.1%, from 6.8%. That's the highest rate since 1992.
The mortgage market has repriced sharply during the past four weeks. The average two year fixed rate mortgage surpassed 6% two days ago, up from 5.34% a month ago. We're unlikely to see moves to the same degree, but we'll have to wait for the reaction in markets for any certainty. We do know that mortgage rates won't be easing until that Core CPI figure starts showing signs of improvement.
A big decision for the Bank
A hike at tomorrow's Bank of England Monetary Policy Committee (MPC) meeting is nailed on, but May's inflation figures raise the prospect of a 0.5% move to bring the base rate to 5%.
“It is possible that the Bank will raise rates by 50 basis points tomorrow and will need to hike rates above 5.25% to get on top of core inflation,” Paul Dales, chief UK economist at Capital Economics tells Bloomberg News.
This is a serious situation for the 1.4 million or so people that will need to remortgage this year, most of whom are currently sitting on sub-2% rates. Another 1.6 million deals will come up for renewal in 2024. The big lenders will sit down with chancellor Jeremy Hunt on Friday to discuss ways to protect borrowers, but there's little the government will be prepared to do - the financial pain of hiking cycles is a feature rather than a bug.
However, for all the talk of the ticking 'mortgage time bomb', the likely impact of all of this will be a slowing of transaction activity. Repossessions and forced selling will remain ultra-low relative to previous dips due to rafts of regulations introduced to protect borrowers since the financial crisis.
Brownfield first
"The market is likely to lack urgency until there is more certainty over the trajectory of interest rates."
That was Berkeley Group chief executive Rob Perrins this morning as the company released its full year results for the year through April. Pre-tax profits rose 9.5% to £604 million. Forward sales were sustained at £2.1 billion and sales pricing had "remained firm" as build cost inflation had moderated. The company "will remain cautious in committing to new investment until the conditions for growth are in place."
Almost nine in ten homes the company delivered were on brownfield land, making Berkeley the only large-scale UK developer aligned with the government's brownfield first agenda, the company said. A deeper recognition of the societal benefits of the strategy should be embedded in the planning system, Mr Perrins added:
"The challenge [of the brownfield-first strategy] is increased when set alongside the uncertainty from a continually evolving and increasingly burdensome regulatory environment. While well-intended, this is constraining investment into brownfield regeneration and homebuilding. If housing delivery is to be maintained the planning system needs to respond to these challenges and certainty is needed in the regulatory environment as a matter of immediate priority."
Environmental obsolescence
Around 7m sq ft of institutional grade office leases in London with an EPC rating below grade C are due to expire between 2023 and 2027. At that point, without capital expenditure to retrofit or refurbish to higher EPC ratings, this space will no longer be fit for purpose under the government's proposed minimum energy efficiency standards (MEES).
To find out how developers are reacting, Anna Ward is joined by our head of London research Shabab Qadar and our head of planning Stuart Baillie for a new episode of Intelligence Talks. They discuss where it makes most sense to refurbish, how owners can go about modernising portfolios and to what extent obsolete offices will be converted to residential.
Listen here, or wherever you get your podcasts.
In other news...
Squeeze on UK tenants tightens as rents outpace incomes (Reuters).