The shifting outlook for mortgage rates
Making sense of the latest trends in property and economics from around the globe.
5 minutes to read
Mortgage rates
Earlier this week, the ONS announced that the headline rate of inflation fell less than analysts had expected. Core inflation - the measure that strips out volatile aspects like energy and food - accelerated to the highest level since 1992. The release prompted an ugly reaction in markets, with gilt yields surging to levels akin to the days following the mini-budget.
Gilt yields feed into mortgage rates and some lenders have already started repricing. Nationwide was first out of the blocks, announcing that it would increase the cost of all fixed-rate products by up to 0.45% as of this morning.
Mortgage rates have been stable for several weeks and lenders have shown willingness this year to absorb volatility to remain competitive. That clearly has limits and we'll see more lenders reprice over the coming week or two. Mortgage rates will now likely peak higher and remain there for longer.
US bank Citi said it now expects two further hikes from the Bank of England, rather than one it had previously forecast, with no rate cut in November. Though the headline print looked bad, "the details are a little more dovish," it said, adding that it continues "to expect sharp cuts through 2024."
Rising rents
Rents continue to rise sharply as the pool of tenants expands relative to the number of homes available. UK rents climbed 4.8% in the 12 months to April, up from 4.7% a month earlier, according to official figures out this week. Rents in London climbed 5%, the fastest rate since November 2012.
Higher mortgage rates means many tenants are opting to keep renting rather than set foot on the housing ladder. Meanwhile, landlords are leaving the sector following a series of tax hikes. The build-to-rent sector is growing quickly, but not fast enough to meet demand.
It's one of the various housing-related issues that are already taking centre stage ahead of a likely general election next year. Here is Tom Bill, Knight Frank's head of UK residential research:
“Rents continue to rise sharply as a supply shortage makes life difficult for a growing number of tenants. Politicians have targeted landlords with a series of tax hikes in recent years and as more of them leave the sector, fast-rising rents means the pain has spread to tenants. More details were announced last week on the government’s Renters Reform Bill, which needs to make sure it doesn’t make a bad situation worse. Around a fifth of households in England are renting, which is a lot of voters.”
Prime offices
London's West End encapsulates the growing polarisation between offices that meet the needs of today's occupiers, and everything else. Though take up of new and refurbished space in the West End fell in Q1, it remained 50% above trend and accounts for 57% of all transactions, according to Knight Frank data.
GPE reported its full year results on Wednesday and upgraded its prime rental forecasts for the year. Here is chief executive Toby Courtauld:
"For some time, we have witnessed a growing divergence between the prospects of the best spaces versus the rest, and we believe this is set to widen further as customers seek out sustainable and well designed, prime spaces, of which there is a marked shortage, particularly in the West End. Consequently, we have increased our rental growth guidance for our prime offices to be between 3% to 6% for the year."
Knight Frank's head of London offices Philip Hobley told Bloomberg this week that prime space "addresses the needs of occupiers in the post pandemic world" as they "try to deliver much more dynamic environments that are going to support the workforce as it returns to the office."
Playing the game
Skittish financial markets and rising mortgage rates aren't themes confined to the UK.
US mortgage rates edged higher this week as the deadline to raise the national debt limit drew nearer. Resilient economic figures are also fuelling speculation that the Federal Reserve will opt to keep tightening rather than pause.
The average 30-year rate rose to 6.57%, according to FreddieMac data published yesterday. Elevated rates are constraining supply in the sales markets as "homeowners seem unwilling to lose their low rate and put their home on the market," the company said.
Perhaps counter-intuitively, the situation is playing out well for homebuilders, whose stock makes up an increasingly large share of available inventory. As Rick Palacios of John Burns Real Estate Consulting told the FT earlier this month:
“It’s as if there is a game being played and one team decided not to come.”
Global mobility
Global mobility has long been a must-have for wealthy investors, fuelling demand for second passports, visas and citizenships.
On 17 February 2022, as Russian tanks and troops massed on the Ukrainian border, the UK government announced the immediate and permanent closure of its Tier 1 Investor visa scheme for foreign nationals. Dramatic as it was, the announcement was just one change in a sector undergoing rapid growth and evolution.
For the latest Wealth Report, I spoke to three leading experts to get a better feel for how global mobility has changed since the Covid-19 pandemic. It's clear that a broader demographic are now eager to be more mobile, including those seeking protection from arbitrary border lockdowns, or looking to work in another country. You can read more here.
In other news...
Record net arrivals highlight UK's post-Brexit migration dilemma (Reuters), energy bills unlikely to hit pre-crisis levels for 2 years, Britain’s regulator warns (FT), and finally, Germany drops into recession with 0.3% fall in GDP (Times).