The recovery wobbles as higher mortgage rates bite
Making sense of the latest trends in property and economics from around the globe.
4 minutes to read
Paying off the mortgage
The recovery in house prices and mortgage market activity that took hold in early spring appears to have plateaued, according to metrics covering house prices and mortgage lending released yesterday.
House prices dipped 0.1% in May, bringing the annual change to -3.4%, Nationwide reported. Meanwhile, mortgage approvals for house purchase, a good indicator of future lending, slipped back to 48,700 in April, from 51,000 in March, according to Bank of England figures.
The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages rose by 5 basis points in April to 4.46%. Higher rates are driving borrowers to pay down their mortgages at the fastest rate on record, excluding the period at the onset of the pandemic. Borrowing of mortgage debt declined from net zero in March to £1.4 billion of net repayments in April.
Higher rates
The path to normality from the volatile conditions of late 2022 was never going to be uniform. Roughly half of mortgage holders are yet to refinance since the Bank of England started raising rates, so there is plenty of pain to come.
Median forecasts from economists polled by Reuters between May 25th and May 31st (that ugly inflation reading fell on May 24th) suggested that the BoE will hike by 25 basis points in June to bring the base rate to 4.75%. They forecast the rate topping out at 5% by the end of Q3.
Mortgage rates have continued ticking up since we checked in on Wednesday. As of yesterday morning, borrowers could still secure five-year fixed rate products below 4.5%, but likely not for long. Leading two-year fixed rate products were approaching 4.75%, according to colleagues at Knight Frank Finance.
Global inflation
The next Consumer Prices Index, due out June 21st, will be watched closely, to put it mildly. Core price growth accelerated to their highest level since 1992 last month, taking markets by surprise and causing gilt yields to spike to levels akin with the weeks following the mini-budget.
There are reasons to be hopeful. Inflation expectations remain well anchored, both among consumers and businesses. The Bank of England's monthly survey of chief financial officers, for example, found that businesses expect to raise prices by 5.1% over the coming year, down from 5.9% in April’s survey. That's the lowest reading since Russia’s invasion of Ukraine.
We got good news from Europe this week, too. Eurozone inflation fell more than economists had expected to hit its lowest level since Russia’s invasion of Ukraine. The data from Germany, France and Spain is particularly encouraging.
The US Bureau of Labor Statistics will release its latest jobs report later today. Economists surveyed by Bloomberg estimate the US economy added 195,000 new non-farm jobs last month, down from 253,000 in April.
Office requirements
This week, Knight Frank, led by Lee Elliott, released our annual (Y)ourSpace report. The document includes a survey of almost 650 corporate real estate leaders that took place during March and April. The initial launch of our findings draws upon the views of the 357 corporate real estate professionals operating at a multi-market level in either regional or global positions to give you a macro-view of where corporate real estate sentiments are shifting for the next three years.
The report is packed with information covering corporate real estate strategy and the changing structure of portfolios. Among the key questions that have emerged since the pandemic concerns the quantum of space that office occupiers will require over the long term as working habits settle. The answers contain variance and nuance, and our survey shows that the projected amount of space held in occupied portfolios will be subject to change over the next three years but, not necessarily in a downward direction.
Some 55% of all respondents expect to see an increase in their total portfolio size between now and 2026, with the balance split almost evenly between those anticipating either stability or a decrease. This data contrasts with the findings of the 2nd edition of (Y)OUR SPACE which showed expansionary intent for a third of respondents. Of those anticipating expansion, 4 in 10 believe their global footprint will increase by more than 10% of its current size. In contrast, just 5% of respondents expect to see portfolios reduce by more than 20% of their existing size. See the report for more.
In other news...
The case for ‘team transitory’ lives on (FT).