Cheaper mortgages may be the silver lining amid tariff chaos
Making sense of the latest trends in property and economics from around the globe
5 minutes to read
It will take about ninety days for the cost of tariffs to feed through to price tags on American shelves. In the interim, businesses and consumers will be beset by speculation over whether America's trading partners will escalate the trade war and what the subsequent impacts on jobs and borrowing costs will be.
The S&P 500 sank 4.8% yesterday, the biggest drop since Covid first swept through western economies. That will almost certainly be the harbinger of a contraction in business investment and consumer spending that will push the US either close or into recession, economists say. Capital Economics reckons US inflation will move above 4% by the end of the year.
The tariff regime is more severe than the most bearish scenarios suggested, which prompted confusion over what all this might mean for interest rates. In the US, higher inflation looks certain, but weaker growth might coax the Federal Reserve into cutting to prop up the economy. Bloomberg recounts how UBS said it now expected as many as four cuts from the Fed through this year, shortly before Morgan Stanley issued its own outlook saying officials would be forced to hold rates steady until early 2026 at least.
The market has so far taken the former view: benchmark 10-year U.S. Treasury yields slid under 4% as traders priced in more than 100 basis points of cuts this year.
Global reverberations
The shock will now reverberate through the global economy. Europe faces the prospect of a flood of Chinese goods that will hit its already embattled manufacturers, denting inflation. The European Commission will likely use its own tariffs to stem the flow, the FT reports. Here too, traders are now betting on a steeper cutting cycle from the European Central Bank.
In the UK, swap rates dropped, which could tee up cuts to mortgage rates in the weeks ahead. Gilt yields slipped under 4% for the first time since October and traders now expect the Bank of England to execute at least two 25bps cuts this year.
Cheaper mortgages will be one of very few - if not the only silver lining. Oxford Economics said it now expects GDP growth of a little under 1% this year, and cut its 2026 outlook from 1.5% to 1%. This would be disastrous for Chancellor Rachel Reeves, who was warned by the OBR that any worsening of the outlook for growth will eat into her financial headroom, teeing up tax rises later this year.
The Bank of England will likely maintain its cautious stance. In the US, long term inflation expectations have risen sharply - central bankers watch these metrics closely; expectations of higher inflation could prompt employees to demand higher wages and employers may raise prices preemptively - creating a self-fulfilling cycle that drives inflation up. A Bank of England survey of finance chiefs earlier this week showed expectations for consumer price growth have risen to 3.2%—the highest in a year—while firms plan to raise their own prices by 3.9%
Below trend
Global house prices continued to rise at a modest pace through the final quarter of 2024, according to Knight Frank's Global House Price Index. Annual growth of 2.6% is well below the long-term rate of 4.8%, extending a run of below-trend growth that began in early 2022.
Growth will gain traction if interest rates are cut further, and we do expect the average rate of house price growth to pick up in the second half of the year, though the tariff regime now presents a clear downside risk to this view.
Turkey leads our index, recording the strongest rate of annual growth at 29.4%. However, when adjusting for inflation and considering real price growth, house prices in Turkey are actually falling by 10.4% on an annual basis. European markets dominate the top of our table in terms of annual growth, with seven markets led by Bulgaria experiencing growth over 10%. At the bottom of the table are mainland China and Hong Kong SAR, both of which saw prices decline by more than 8% throughout 2024.
If we adjust our GHPI index for inflation, we find that global house prices peaked in Q1 2022 and have since fallen by 3.6% over two years. The last time real prices experienced a decline was in the aftermath of the Global Financial Crisis, when prices fell by 10% over five years.
ESG: it pays
ESG matters so much in real estate because it pays. Regulators have successfully built frameworks that enable investors to access cheaper capital, and the market compensates developers for upgrading buildings.
This alignment of incentives has insulated real estate from the ESG culture wars unfolding elsewhere. Arguments over whether companies should solely pursue shareholder value or should take into account societal obligations don't matter when the two neatly overlap.
Knight Frank's latest ESG Property Investor Survey confirms that the primary driver behind ESG adoption remains financial. More than six-in-ten investors cite enhanced returns as a key motivation for embedding ESG into real estate strategies. Among those managing the largest pools of capital, that number rises to 77%.
A further 41% of respondents say ESG strategies improve access to finance. As sustainability-linked loans become more widespread and banks tighten requirements on poorly rated assets, ESG performance is becoming a gatekeeper for liquidity. You can read more on the survey from Flora Harley here.
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