A 'finely balance' decision shows rate cuts are approaching
Making sense of the latest trends in property and economics from around the globe
5 minutes to read
On the face of it, yesterday's Bank of England vote to hold the base rate at a 16-year high of 5.25% looked a lot like last month's decision.
Two of the nine members continue to believe that the time to begin cutting has already arrived - the same as at the May meeting - "to allow a smooth and gradual transition in the policy stance, and to account for lags in transmission." Seven still believe it's too early, but cracks are emerging.
For the hawks, just because inflation has return to target, that doesn't mean it will stay there - see Wednesday's note. Both wages and the costs of services are rising too quickly to hold inflation at 2% and the group "wants more evidence of diminishing inflation persistence" before voting to cut. For the others, the decision "was finely balanced". The rising price of services is also the key problem for this group, but they noted that the impact of the increase in the National Living Wage this April on aggregate pay growth won't be as large in future.
Traders are now pricing in a 40% chance of a rate cut in August, up from about a third before the decision.
Sluggish
Inflation has provided a few nasty surprises since the turn of the year, and there may well be more, but consumers believe it's increasingly unlikely. GfK's measure of consumer sentiment rose to a two-and-a-half year high this month due to a brightening outlook as to how the economy is performing.
Granted, at -14 the reading is still negative, but it's up from -17 last month and a record low of -49 back in September 2022. This is all mercifully boring. Much of it tally's with reports from the Bank of England's regional agents, which gather information from at least 700 businesses each quarter. Those contacts reported a notable pick up in consumer demand during Q2, though caution is still dragging on growth.
In the housing market, those contacts "report that the housing market is stable in terms of the number of transactions and level of demand. Some even compare it to the ‘normality’ of pre-covid." Supply in the rental market is improving slowly, and demand is moderating, which is putting the brakes on rising rents. In the commercial property market, "transaction volumes are reported to have grown slightly compared to a year ago and are expected to grow more quickly over the coming year. Contacts attribute this to a currently stable – and likely falling – outlook for debt costs and reports that banks have reduced their tolerance for forbearance."
An 'island of stability'
Election polling, for the time being, remains unequivocal. Setting aside the policies of the two main parties, investors like stable governments that may be exactly what we'll get.
Britain may be embarking on a period of stability that will contrast sharply with recent years. Comparisons are inevitably being made with France, where a contentious election campaign is underway. The European Commission this week said France and six other countries should be disciplined for running budget deficits in excess of EU limits. The IMF followed that up this morning with a warning that eurozone countries with high debts and deficits will need “front-loaded” austerity to win over financial markets.
We're seeing this play out in stock markets, too. As Khadija Hussain notes in the latest Leading Indicators, the region-wide Europe Stoxx 600 index experienced its steepest decline since October 2023 following Macron’s election call. The CAC 40, which tracks the 40 largest French stocks, dropped -6%. By contrast the FTSE 100 has hit all-time highs this year, posting a +9% gain YTD. Britain could well become “an island of stability,” says UBS Head of G10 FX Strategy Shahab Jalinoos.
Affordable housing
Delivery of Affordable Housing has plummeted in many locations.
Official figures from the Greater London Authority confirm that affordable housing starts in London fell a staggering 90% to just 2,358 in the 12 months to end March 2024, for example, down from 25,658 the previous year. Across England, the latest data on affordable housebuilding shows that grant-funded starts of social rent, affordable rent and shared ownership properties fell by 60% year-on-year in the first half of the 2023/24 financial year.
We consider where the sector goes from here in a new report, out this week. There remains insufficient public funding available to plug the supply gap on its own, so more institutional capital will be needed. It is coming - at the start of 2024 there were there were 69 For-Profit Registered Providers in the UK. This has more than tripled in the last decade.
For institutions, the continued supply and demand imbalance, long-term income and inflation-hedging characteristics make affordable housing an attractive proposition. It also offers strong ESG attributes, particularly with regards to the social impact of delivering new affordable housing. In addition, more affordable rents mean longer tenancies. Longer tenancies mean lower void periods, turnover costs, maintenance spend and more secure income streams. In the UK, 47% of social renters have been in their current home for over 10 years, with only 18% renting for less than three years. This is almost directly inverse to renters in the private sector.
That said, some in the sector have paused or slowed acquisition and development activity in the wake of increasing costs and market uncertainty. Still, investor appetite remains substantial. More than three quarters of respondents to our survey plan to increase their total investment into affordable housing over the next five years. Stability of policy, particularly of rental policy, grant funding, and Section 106 supply routes, will be vital to underpinning confidence.
In other news...
Britain’s birth rate halves as wealthy countries face ‘low fertility future’ (Telegraph), and finally, the SEC turns its gaze to 'AI washing' (Bloomberg).