Has UK inflation peaked?
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
Incoming
It's going to be a big week for bad UK economic data but there will be silver linings.
The ONS will on Wednesday publish October's Consumer Price Index. Economists expect that energy prices will have pushed the annual rate of inflation to just shy of 11%, up from 10.1% a month earlier. That's a new 40-year high, though consensus suggests this will be the peak before easing begins early next year. Core inflation, which strips out volatile food and energy prices, has likely already peaked.
The following day Jeremy Hunt will deliver his Autumn statement in which he will try to plug a much publicised £58 billion black hole in the public finances. You can see our take on the likely implications for the residential market here - there is speculation the tax-free allowance for Capital Gains Tax may be cut or that rates will be aligned with income tax, which would mean higher tax bills when second-home owners sell.
The Office for Budget Responsibility will simultaneously publish a new, dire set of forecasts for the economy, though they won't be as bad as the potential two-year recession forecasted by the Bank of England earlier this month. That's largely because OBR is set to base its forecasts on a slightly lower path of interest rates, according to the FT's Chris Giles.
Peak rates
The Bank of England's Monetary Policy Committee was pretty unified in its thinking at November's meeting, with seven of its nine members voting for a 75bps increase in the base rate.
The potential arrival of peak inflation raises the prospect we'll see more members turn dovish from next month. A speech by MPC member Silvana Tenreyro on Friday fleshed out what that looks like (Reuters summary here). Tenreyro was the only member to vote for a 25bps hike at the November meeting and believes interest rates are already in restrictive territory. She thinks a recession is likely even if the base rate remains at 3%, leaving inflation to fall below target in the medium term, prompting rate cuts from 2024 onwards.
Granted Tenreyro is firmly in the minority for the time being and Jonathan Haskel, another MPC member, offered a different perspective on Friday. There remains a risk that rising prices become embedded, in which case monetary policy would have to be tighter for longer, prompting a prolonged recession, he said. The governor Andrew Bailey sits in that camp - he told a local newspaper on Friday that efforts to curb inflation are likely to take between 18 months and two years.
The next decision on interest rates will be published on December 15th.
Residential land values
A shortage of development land put a floor under values during the third quarter (see chart).
The value of both prime central London (PCL) and urban brownfield sites were unchanged between July and September as both major housebuilders and Housing Associations looked to build pipelines, according to our index. Prime central London’s land prices continue to be bolstered by competition from a variety of uses.
The value of greenfield development land fell 2.9%. Responses to our survey of SME homebuilders and developers suggested that the increased cost of living was having a moderate to significant impact on buyer sentiment, and the subdued pricing in both greenfield and urban brownfield sites reflects concerns over future customer demand.
Some 34% of survey respondents identified material and labour costs as a significant challenge to development. This response is borne out by the BCIS Build Cost Index which grew on average by 12.4% in Q3 2022, down from 14.7% in Q2 2022. Build costs are forecast to remain elevated for the remainder of 2022, before levelling out at 3.9% from Q2 2023.
Calling the bottom in China, continued...
We talked on Wednesday about a pretty broad-based rally in Chinese property developer stocks. At the time the rally looked to have been underpinned by a mixture of optimism about a potential easing of zero-Covid regulations and what seemed to be a fairly modest expansion of a financing support package.
A day later Bloomberg reported that the government was planning something much bigger and on Friday the officials outlined a 16-point plan aimed at stabalising the property sector. Shares in Country Garden Holdings, China's largest developer, are up 55% this morning.
Crucially, the plan removes any deadline for lenders to cap the proportion of outstanding property loans at 40% and mortgages at 3.25% - a key policy that has starved the sector of liquidity.
In other news...
Our retail expert Stephen Springham looks back on "a tumultuous Q3 economically, socially and politically, but during which many of the retail metrics remained surprisingly resilient."
Elsewhere - London green belt row threatens plan to build Europe’s largest data centre (Telegraph).