Housing Market and Inflation

As a result of the Federal Reserve’s ongoing policy of tightening credit, the housing market is experiencing some difficulties. Mortgage lenders have pulled nearly a thousand products from the market since the recent mini-budget chaos, making it difficult for borrowers to secure financing due to uncertainty over the path of long-term interest rates. The cost of building plots skyrocketed as a result of falling supply and rising demand. Recent statistics show that the building industry as a whole is slowing down, which is having serious consequences. This is a major contributor to the sluggish economy and may even cause a recession. Annual home price growth slowed to 8.3% from 9.8% after monthly declines of 0.1% in September and 0.4% in October. A slowing of price increases is crucial because it will discourage people from moving before the market stabilizes. In the coming months, the unemployment rate is predicted to double if the Bank of England continues its policy of raising short-term interest rates. There appears to be no end in sight for inflation as long as it stays where it is now. The government is providing cost-of-living adjustments to all citizens and utility bill rebates to homeowners.To learn more about the current state of UK’s inflation, check out Lordping.co.uk.

Members of the Bank of England’s Monetary Policy Committee Huw Pill, Jonathan Haskell, and Silvana Tenreyro will be making public statements this week. After hearing Andrew Bailey’s press conference after last week’s meeting, it’s highly unlikely that they will do anything other than express their agreement that rate increases should continue for at least another quarter. The dollar fell yesterday as investors became more willing to take risks in light of the upcoming election, driving up the value of the pound. The day started at 1.1511 and ended at 1.1551. This Friday, we’ll get new trade and manufacturing figures. In addition, the GDP estimate for the third quarter will be released, and a decline of 0.5% from July to September is expected.According to figures released by the Office for National Statistics (ONS) on Wednesday, 16 November 2022, the Consumer Price Index (CPI) increased by 11.1% year over year in the 12 months ending in October 2022, marking the highest 12-month rate of inflation since October 1981. Excluding the effects of price changes in food, energy, alcohol, and tobacco, annual core inflation remained unchanged in October at 6.5%. Although the government’s Energy Price Guarantee (EPG) went into effect in October, rising gas and electricity prices still drove the monthly and annual change in CPI inflation rates. A significant contributor to the higher inflation rate was the rising cost of food. The EPG implementation in October caused a 24.3% increase in the cost of electricity, gas, and other fuels, with increases of 36.9% for gas and 16.9% for electricity. The ONS estimates that consumer price index (CPI) inflation would have been around 13.8% (instead of 11.1%) if the EPG hadn’t been implemented between September and October 2022. In October 2022, the cost of heating a home with electricity, gas, and other fuels was on average 88.9 percent higher than it had been in October 2021. The United States saw the largest increase in gas prices, with prices doubling between October 2021 and October 2022.

In the 12 months ending in October 2022, the price of food and nonalcoholic beverages increased by 16.4%, up from the 14.6% increase seen in the previous month. The industry has seen rising inflation for 15 consecutive months, with prices rising from a low of 0.6% in July 2021. According to projections, this is the highest rate since September 1977. In October 2022, consumer prices in the UK increased by 2.0% month-over-month, up from the 1.1% increase seen in September. Utilities like gas and electricity contributed significantly to the monthly rate increase in October. 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 isn’t contained quickly enough for central banks to stop tightening in 2023. Between 16 and 18 percent of annual gross domestic product is attributed to housing activity in the United States and Britain. This includes construction, sales, and the subsequent demand for goods and services. The former amount is more than £500,000,000, while the latter is over $4,000,000,000. With long-term fixed mortgage rates now above 7% for the first time in 20 years, the housing market in the United States is feeling the heat. That’s over twice as fast as January’s rate. 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 (the subprime mortgage crash of 2007-2008 being the exception).

Twenty years ago, after the dot-com bust and stock market crash led to a surprisingly mild global recession, The Economist published a cover story titled “The houses that saved the world.” As a result of lower mortgage rates, refinancing, and home equity withdrawal, the article found that the hit to corporate demand was mitigated. After the stock market crash of 2018, however, this strategy is much less likely to save the day because interest rates are expected to rise even further into 2023, and many people are worried about potential distress and delinquency in the sector in 2023. According to a recent survey by Bank of America, 10% of international investors believe that the real estate market in developed economies is the sector most likely to cause a new systemic credit event. The Bank of England thinks a recession has already started in Britain, making that country especially vulnerable. The British market may be an outlier despite the double whammy of rising Bank of England rates and an anticipated fiscal squeeze this week. This is because British homeowners have a disproportionate exposure to floating rate mortgages and are more vulnerable to rising unemployment. Finance Minister Jeremy Hunt’s sudden fiscal U-turn away from September’s disastrous giveaway budget was widely believed to have been driven by a desire to cushion the impact on the housing market from the Bank of England’s initial interest rate hike warning. According to the National Institute of Economic and Social Research, a British think tank, ten percent of British households, or about 2.5 million people, would be negatively affected if the Bank of England were to raise interest rates again next year. About 30,000 people’s monthly mortgage payments would be more than they could afford if interest rates reached 5%. This is why 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, despite money market expectations that rates will peak at 4.5%, up from the current 3%.


Why there won’t be anything to save the housing crisis (for now)

Goldman Sachs’ chief economist Jan Hatzius and his team believe the risk of a major credit event in developed housing markets may be exaggerated because many homeowners still have access to low, long-term fixed mortgage rates and substantial equity buffers. But they were adamant that Britain is still a force to be reckoned with. A “significant spike” in UK mortgage default rates is a “relatively larger danger,” Goldman warned last month. This reflects our more gloomy outlook for the UK economy, the greater sensitivity of default rates to downturns, and the shorter term of UK mortgages. Variable mortgage rates in Australia and New Zealand are higher, while British homeowners are more vulnerable to rising unemployment. Goldman predicts that a one percentage point increase in British unemployment will increase mortgage delinquency rates by more than 20 basis points after one year. This is double the impact that the same increase in unemployment would have in the United States, where it would have an impact of 10 basis points. Even though hopeful forecasts persist, this is a bad sign for UK home prices. U.K. real estate consultancy Knight Frank forecasts that house prices across the country will drop by 5% in 2020 and again in 2024, for a total drop of almost 10% that will only bring average prices back to where they were in the middle of 2021. It is anticipated that London prices will remain stable over the next decade, with a total increase of only 1.5% over the next five years, from 2020-2026. The NIESR economist Urvish Patel agreed, saying that “fears of a house price and housing market collapse because of higher mortgage rates are unlikely to be proved correct.” These concerns can be mitigated by factors like the fact that most people will be on fixed rates, supplies are still limited, and stamp duty taxes are scheduled for another reduction soon. A 1% annual increase in index-linked UK government bond yields could result in a 20% decline in real house prices, according to research he cited from the Bank of England in 2019. 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 worrying development. They have dropped thanks to BoE intervention, but they are still a full percentage point or two higher than this time last year.



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