A perilous moment for the global economy
Making sense of the latest trends in property and economics from around the globe
5 minutes to read
Is inflation really contained or, given recent strong data from the UK, Europe and the US, have central bankers missed something important? How large will Donald Trump's tariffs be? And how inflationary will they be? Will the president oversee a period of broad fiscal irresponsibility? Will European governments get a handle on their own borrowing? Are key western economies sliding into a period of higher inflation and little to no growth, also known as stagflation?
Barring a few other technical factors, all of these questions are, to varying degrees, fuelling a sell off in government bonds, which is driving yields higher in the US and a handful of the larger European economies. In the US, 10-year Treasuries have surged half a point in the past month to near 4.7%. Options trading suggests the rate could surpass 5%, which would be the highest since October 2023. In the UK, the yield on the 30-year gilt touched 5.25% yesterday, surpassing the post-mini-budget peak to hit the highest level since 1998.
The drivers for the sell-off are complex - the long dated nature of these bonds mean they are influenced by more than just central bank expectations. Investors are effectively demanding higher returns given the competing uncertainties the global economy faces - Bloomberg's John Authers has a good, though technical and US-focussed, explanation here - and I have said nothing of the conflict in Ukraine, or the prospect of little to no growth in China.
Beyond the broad ominous signs this carries, any sustained upwards moves in government borrowing costs could quickly translate into higher debt costs for purchasers of both commercial and residential real estate. Beyond that, the rise in UK yields virtually wipes out the "headroom" that chancellor Rachel Reeves has under her own fiscal rules. That would leave her the unenviable choice of issuing another round of tax hikes or breaking the rules - the government's statement to the FT is fairly unequivocal that it would opt for the former over the latter.
The UK housing market
UK house prices fell 0.2% in December, Halifax reported yesterday. The decline ends a run of five consecutive increases and pares the annual growth rate to 3.3%.
The index is at odds with Nationwide's, which said house prices climbed 0.7% during the month. Halifax's better reflects other indicators, like the Bank of England's measure of mortgage approvals, which decreased by 2,400 to 65,700 in November.
“The current rate of house price growth will come under more pressure as higher borrowing costs triggered by the Budget start to bite," said Knight Frank's Tom Bill. "A number of buyers are still sitting on sub-4% mortgage offers made before October, which has supported demand in recent months. Activity has also been temporarily boosted ahead of April’s stamp duty increase but a recent dip in mortgage approvals is a sign that cracks from the Budget are starting to show. We recently revised down our UK house price forecast for 2025 to 2.5% to reflect the tougher lending landscape and the fact economic growth is struggling to gain momentum.”
You can read a more detailed assessment of UK housing market conditions from Tom here.
Pressure on the countryside
The farmland market edged up slightly during 2024, according to the latest results from the Knight Frank Farmland Index. The average value of bare agricultural land in England and Wales started the year at £9,152/acre and, heading into 2025, stood at £9,164/acre, a slight rise of 0.1%.
Given some of the challenges that have faced the farming industry over the past 12 months, this shows the inherent resilience of agricultural land as a multi-functional asset class. Wet weather, the slow rollout of the government’s new environmental schemes, sharper-than-expected cuts to what remains of the Basic Payment Scheme, and an Autumn Budget that, it’s fair to say, included some concerns for rural property owners, have all put pressure on the countryside.
Despite this, availability has remained at historically low levels, with fewer than 90,000 acres finding their way onto the public market during 2024. Price growth peaked at the end of September, with values falling back by 2% in the final quarter of the year. This followed the removal of 100% relief on Inheritance Tax (IHT) for agricultural property by Chancellor Rachel Reeves in Labour’s first budget in over 14 years.
A three-fold increase
Investors spent £6.3 billion on UK hotels last year, a three-fold increase on the previous year that brings volumes back in line with 2019 levels, according to the latest figures from Philippa Goldstein.
The increase reverses a three-year decline and was "underpinned by the robust recovery in hotel operational performance, strong demand fundamentals, and improving investor confidence." The make up of deals has changed since the onset of the pandemic: portfolio transactions representing 57% of total investment, equating to more than £3.6 billion. Overseas investors accounted for three quarters of total volumes.
For more on commercial property markets, listen to Knight Frank's latest Intelligence Talks podcast, out today. Anna Ward is joined by our UK head of commercial research, Will Matthews, London research head Shabab Qadar and associate in retail research Emma Barnstable.
We hear from Emma on how attitudes towards the retail sector are the most positive they have been for years, with retail the best performing mainstream property asset class in 2024. Two-thirds of the Top 300 retailers are rated low-risk. Despite this, investment volumes last year fell short of 10-year averages. Could 2025 be a more profitable year for investors? Shabab talks about how the London office market is at an inflection point, with investor sentiment stabilising, pointing to renewed activity into 2025, particularly for top-tier office spaces.
In other news...
UK construction slows to a six-month low (Reuters), dollar drops over report Donald Trump considering scaling back tariff plans (FT), French red wine in sharp decline as tastes change among young drinkers (FT), JPMorgan plans to bring staff back to the office five days a week (Bloomberg), UK moves further away from five-day office week (Times), and finally, markets sound alarm over deflationary spiral in China (Bloomberg).