The housing market is going through some rough patches as a direct consequence of the Federal Reserve’s ongoing policy of increasing the cost of obtaining credit. Since the recent chaos surrounding the mini-budget, mortgage lenders have removed nearly a thousand products from the market. This has made it difficult for borrowers to secure financing due to the uncertainty over the path that long-term interest rates will take. Because of a decrease in supply and an increase in demand, the price of building plots shot through the roof. The construction industry as a whole is showing signs of slowing down, which is having significant repercussions according to recent statistics. This is a significant factor that contributes to the weak state of the economy and may even bring about a period of recession. Following monthly decreases of 0.1% in September and 0.4% in October, annual home price growth slowed to 8.3% from 9.8%. This comes after monthly declines of 0.1% in September and 0.4% in October. A moderation in the rate at which prices are rising is absolutely necessary because this will dissuade people from moving before the market has stabilized. If the Bank of England maintains its policy of raising short-term interest rates, it is anticipated that the unemployment rate will more than double over the course of the following months. As long as it remains at the same level as it is right now, there does not appear to be any end in sight for inflation. Homeowners are eligible for rebates on their utility bills, as well as cost-of-living adjustments, which are being provided by the government. To learn more about the current state of UK’s inflation, check out Lordping.co.uk.
This week, members of the Monetary Policy Committee at the Bank of England, including Huw Pill, Jonathan Haskell, and Silvana Tenreyro, will be releasing statements to the public. It is extremely unlikely that they will do anything other than express their agreement that rate increases should continue for at least another quarter after hearing Andrew Bailey’s press conference following the meeting from the week before. The value of the pound has increased as a direct result of investors becoming more willing to take risks in light of the upcoming election, which led to a decline in the value of the dollar yesterday. 1.1511 was where the day began, and 1.1551 was where it finished. On Friday, we will receive new data pertaining to both trade and manufacturing. In addition, the GDP estimate for the third quarter will be made public, and it is anticipated that the number will have dropped by 0.5% from July to September. The Consumer Price Index (CPI) increased by 11.1% year over year in the 12 months that ended in October 2022, according to figures that were released by the Office for National Statistics (ONS) on Wednesday, 16 November 2022. This marks the highest 12-month rate of inflation since October 1981. The figures were released by the ONS. When the effects of price changes in food, energy, alcohol, and tobacco are removed from the equation, annual core inflation remained unchanged at 6.5% in October. Gas and electricity prices continued to be the primary contributors to both the monthly and annual changes in CPI inflation rates, despite the fact that the Energy Price Guarantee (EPG) was put into effect by the government in October. The significant increase in the cost of food was a significant contributor to the overall higher inflation rate. Because of the implementation of EPG in October, the cost of electricity, gas, and other fuels went up by a total of 24.3%, with increases of 36.9% for gas and 16.9% for electricity. If the EPG hadn’t been implemented between September and October 2022, the ONS estimates that the consumer price index (CPI) inflation rate would have been around 13.8% (instead of 11.1%), which is a significant difference. The price of heating a home with electricity, gas, and other fuels was on average 88.9 percent more expensive in October 2022 than it had been in October 2021. Between October 2021 and October 2022, the price of gasoline more than doubled in the United States, making it the country with the highest rate of inflation.
The price of food and nonalcoholic beverages saw a 16.4% increase over the course of the year ending in October 2022, which is a larger increase than the 14.6% seen in the prior month’s price increase. Prices have increased from a low of 0.6% in July 2021 and have been climbing steadily for the past 15 consecutive months due to inflation in the industry. Projections indicate that this is the highest rate since September 1977, when it was last measured. The month-over-month increase in consumer prices in the United Kingdom was 2.0% in October 2022, which was an acceleration from the 1.1% increase seen in September. The monthly rate increase in October was significantly impacted by increases in the cost of utilities such as gas and electricity. Moreover, a residential real estate earthquake would hurt many economies even more, amplifying the tremors of the past 12 months in the bond market, if inflation is not contained quickly enough for central banks to stop tightening in 2023. This would occur if inflation is not contained quickly enough for central banks to stop tightening in 2023. In both the United States and Britain, housing-related activities are responsible for somewhere between 16 and 18 percent of the annual gross domestic product. This includes the construction industry, retail sales, and the demand for goods and services that follows. The first amount is greater than 500,000,000 pounds, and the second amount is greater than 4,000,000 dollars. The United States housing market is experiencing increased competition as a result of long-term fixed mortgage rates reaching above 7% for the first time in twenty years. That is more than twice as fast as the rate seen in January. Furthermore, the real estate market is extremely worried about the possibility of a paradigm shift in this entire situation because it has been riding the bond bull market of low inflation and interest rates for the majority of those intervening decades. This has caused the real estate market to be extremely vulnerable to any potential changes in this paradigm (the subprime mortgage crash of 2007-2008 being the exception).
After the dot-com bubble burst and the stock market crashed, which resulted in an unexpectedly mild global recession, The Economist published a cover story with the title “The houses that saved the world.” This was twenty years ago. According to the findings of the article, the blow to corporate demand was cushioned by factors such as declining mortgage interest rates, home refinancing, and the use of home equity. However, after the stock market crash of 2018, it is much less likely that this strategy will save the day. This is due to the fact that interest rates are expected to rise even further into 2023, and many people are worried about the potential for distress and delinquency in the sector in 2023. A recent survey conducted by Bank of America found that ten percent of international investors believe that the real estate market in developed economies is the industry sector that is most likely to cause a new systemic credit event. The Bank of England believes that a recession has already begun in Britain, which makes that nation particularly susceptible to economic downturns. Despite the double whammy of higher Bank of England rates and an expected fiscal squeeze this week, the British market may prove to be an anomaly and outperform expectations. This is because a disproportionate number of British homeowners have mortgages with variable interest rates and are also more susceptible to the effects of an increasing unemployment rate. It is widely believed that the desire to cushion the impact on the housing market from the Bank of England’s initial interest rate hike warning was the impetus behind Finance Minister Jeremy Hunt’s sudden fiscal U-turn away from September’s disastrous giveaway budget. This belief is supported by the fact that Hunt abruptly reversed course away from September’s giveaway budget. If the Bank of England were to raise interest rates once more the following year, the National Institute of Economic and Social Research, which is a British think tank, estimates that ten percent of British households, which is equivalent to approximately 2.5 million people, would be negatively impacted as a result. If interest rates reached 5%, the monthly mortgage payments for approximately 30,000 homeowners would be higher than they could reasonably afford. Because of this, major clearing houses like Barclays and HSBC anticipate that the Bank of England’s terminal rate will be as low as 3.5% and 3.75%, respectively. This is in contrast to the expectations of the money market, which predict that rates will peak at 4.5%, up from the current 3% level.
Why there won’t be anything to save the housing crisis (for now)
The chief economist at Goldman Sachs is named Jan Hatzius, and he and his team believe that the risk of a major credit event occurring in developed housing markets may be overstated. This is due to the fact that many homeowners still have access to low, long-term fixed mortgage rates as well as substantial equity buffers. However, they were adamant that the United Kingdom should still be considered a formidable adversary. Goldman warned their clients one month ago about the “relatively larger danger” of a “significant spike” in the UK’s mortgage default rates. This is a reflection of our more pessimistic outlook for the economy of the United Kingdom, the greater sensitivity of default rates to downturns, and the shorter terms of mortgages in the United Kingdom. The variable mortgage rates in Australia and New Zealand are higher, while homeowners in the United Kingdom are more susceptible to the effects of an increasing unemployment rate. After a period of one year, Goldman anticipates that an increase of one percentage point in British unemployment will result in an increase of more than 20 basis points in the rate of mortgage delinquency. This has a 20 basis point impact, which is twice as large as the impact that the same increase in unemployment would have in the United States, where it would only have a 10 basis point impact. Even though optimistic forecasts are still being made, this is a worrying sign for the housing market in the UK. The real estate advisory firm Knight Frank in the United Kingdom projects that the average price of a home in the country will decrease by five percent in the year 2020 and again in the year 2024, for a total drop of almost ten percent. However, this decline will only bring prices back to where they were in the middle of the year 2021. It is anticipated that prices in London will remain unchanged over the course of the following decade, with a cumulative increase of no more than 1.5% over the subsequent five years, beginning in 2020 and continuing through 2026. Urvish Patel, an economist with NIESR, shared the same sentiment, stating that “fears of a house price and housing market collapse because of higher mortgage rates are unlikely to be proved correct.” The fact that the vast majority of people will be on fixed rates, the fact that supplies are still limited, and the fact that stamp duty taxes are scheduled for another reduction very soon can all help to alleviate some of these concerns. According to the research that he cited from the Bank of England in 2019, a 1% annual increase in index-linked UK government bond yields could result in a 20% decline in real house prices. The yields on 10- and 30-year index-linked gilts were at the epicenter of the budget shock in September, and this was perhaps the most concerning development that took place. They have decreased as a result of intervention from the BoE, but they are still an entire percentage point or two higher than they were during the same time period the previous year.