Markets Weekly podcast

Julien Lafargue (JL): Welcome to a new edition of Barclays Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist here at Barclays Private Bank, and I will be your host today.  

We’re back after a couple of weeks off, and a lot has happened. A lot and not much. In fact, if you were away for the past five weeks or so, and you haven’t looked at your portfolios or markets, well, well done, you’ve avoided a large dose of stress and you haven’t missed a thing. We’re back where we were pre Liberation Day on 2 April.  

In Europe, in fact, the German DAX index made a new record high, and the FTSE 100 in the UK went up for 16 trading sessions in a row.  

Now, of course, there is a lot happening and today I’ll be joined by Stephen Moroukian, the real estate product head here at Barclays Private Bank, to discuss a topic that I know is of interest to almost every single listener - the real estate market. But, before that, let’s recap what just happened over the last week or so. 

Probably, most importantly, what just happened this morning where we got the detail of the US-China trade agreement. As part of this agreement, both nations have agreed to put their tariffs on pause for 90 days. It’s a pause but not really a pause in the sense that tariffs will still be applied.  

Baseline tariffs on both sides will be 10%. For China, when it comes to US imports, it will remain at those 10%. The US will add to that the so-called phantom law tariff, roughly 20%, making the grand total of 30%.  

Now, this is very positive news. Remember that before that tariffs were north of 100% on both sides, and the expectation from markets going into this weekend’s talks in Geneva were for tariffs to maybe be reduced on the US side to 60% or 80%. So, 10% or 30%, however you want to look at it, is very, very good news, even if it’s just for 90 days. 

Now, that’s at least how markets see it. In truth, we still have tariffs being imposed and those tariffs weren’t there a month or so ago. That’s one. And, second, I would question whether this is really the ‘art of the deal’ in the sense that it looks, at least at face value, that I would almost go as far as to say that the US caved in, in the sense that all that China is offering is basically to remove some of the tariffs. Really there hasn’t been any commitment or anything. So, maybe this will come in the next 90 days, we’ll see, but that was clearly the main news of the week including the weekend. 

Beyond that, a couple of important central bank developments with both the FOMC and the Bank of England, and I think it’s going to be great to get Stephen’s take on that. So, let’s start with the US, where the announcement from the Fed, the FOMC, was pretty much in line with expectations, ie interest rates stayed unchanged.  

The policy statement that came with the decision added that risks of higher unemployment and higher inflation have risen and, during the press conference, Jerome Powell offered little in terms of guidance for a possible cut in June. The market continues to believe that the Fed will make its move in July. 

When it comes to tariffs, again things have changed since then, but what Powell said back then, and it feels a long time ago but it was only last week, what he said was that he hasn’t, like all of us, seen the tariff impact in the data yet, but that a shock is probably still yet to come. 

And he diverged a bit from what he said a month ago when he mentioned that the impact of tariffs, in particular on inflation, could be temporary. He addressed that point this time around by saying that there could be cases where rate cuts would be appropriate this year, but he also cannot confidently say that the rate path is for lower rates, ie there could be cases where rates have to stay on hold. And no commitment clearly from the Fed, but a slight move away from, temporary probably, some bad memories from the past coming back. 

And then we had, of course, the other main central bank, the Bank of England, which we can discuss with you, Stephen. But before we do that I think, you know, we haven’t talked to you in a while, unfortunately, and it’s always a pleasure to talk to you, but I think we’ve been through a lot over the last month or so in terms of market turmoil, and I was wondering how that volatility has translated and impacted your world, the real estate world. 

Stephen Moroukian (SM): Hi. Morning, Julien, and great to be back. And, yes, what a month it’s been. In private banking, credit specifically, the main impact of market volatility like the type we’ve seen recently is really our clients with investment leverage. So, that’s a line of credit that’s connected to the overall lending value of a diversified portfolio or single-line stock of investments, and we obviously saw some dramatic decreases.  

Then there’s a need for quick action to be taken against those lending positions. But, as we’ve seen, it’s been a relatively short-lived drama and markets have recovered as you said. And if you tuned out for the last six weeks there’s nothing to see.  

In a property sense, though, it’s actually very unique to the cycle, and it’s a reminder to investors that those owning property, whether that be high-value ‘trophy’ assets or more modest investment properties, that they are real assets and tangible assets which remain a ‘safe harbour’ in times of equity volatility. And at times like this I always like to remind people that, unlike gold and equities, you obviously get the pleasure of living in the property. So, as I’m sure you’ll be unsurprised to hear, that’s where my vote firmly remains. 

JL: Excellent. And I think this is why talking about real estate is so relevant as I think we’re all exposed to it to some degree. Following on from that and everything that we’ve experienced in the markets, in particular one thing that we’ve seen in financial markets, outside of the real estate, is the fact that soft data, sentiment data, has really taken a plunge, whereas the hard data hasn’t really moved yet.  

The expectation is that we’re going to see the tariff shock being translated into maybe the May or the June data, but we haven’t seen that yet. So far, the only thing that has really been impacted is sentiment. How do you think about sentiment within the real estate sector at this point in time? 

SM: Yeah, a really interesting question, Julien. So, as you know, maybe you remember we held a real estate event last year right at the same week the US presidential election results were coming through and, unsurprisingly, our conversation was really about how much was US tariff policy really going to feature in the future. And the shockwaves from 2024, you know, the year of elections, was going to have a profound effect.  

And, against all that unpredictable backdrop, the answer was that borrower and buyer sentiment really is just to get on and transact and do that somewhere that is appropriate and commensurate to the lifestyle and personal wealth ambitions being sought which globally, if it’s going to be the UK, and we’re seeing that from buyers from the US, Latin America, mainland China and the Middle East, all for fairly obvious reasons based on their domestic nuances, pushing them to the UK and/or taking advantage of the US dollar currency play that remains open in London property at the moment, which is also complemented by the pricing opportunity in the market.  

We’ve discussed before that prime and super-prime London is a really important asset class to our clients and we’ve seen a very meaningful uplift in market engagement, increasing activity of buyers, refinancings and those looking to create liquidity for luxury asset purchases or, actually, diversification in the market and those still looking for the right property in London.  

So, that’s in line with what we’d expect for a spring market, this it’s a really busy time of the year, to look like, and then the obvious challenges bubbling away. And this is the time of year where you’ll see serious sellers coming to the market. The gardens are looking at their best, the sun is out, like this weekend, and there’s been real demand in wide footprint homes with potential to extend and augment the footprint. And large gardens in central London right now, Avenue Road in St John’s Wood, is a really good example of where’s really hot for those key reasons. 

So, as we continue to see all that play through, I think we continue with a big bias to cash buyers in London property. There’s definitely that sentiment and that’s coming through in the data. Some of that is driven by interest rates of course, and some of that, frankly, because insufficient preparation has been undertaken by buyers before entering the market, especially coupled with pressure of transacting fast where property supply, especially best in class, is considerably constrained or not even available in the open market today. 

JL: All right. I must confess something. I’m one of those people. I probably am not prime, definitely not super prime but I have, over the last couple of weeks, sold my garden flat in London and bought another property which I hope that I’ll be able to extend somewhere in north London. And the reason I decided to make a move just now is because the garden looks absolutely fantastic and I knew it would be appealing to potential buyers. 

Anyway, enough about my life. I just wanted to bounce back on something that you said in terms of the activity and how people are looking to finance their property at the moment. So, it seems that cash buyers are stepping in, for obvious reasons, but you also mentioned the fact that we are seeing an increase in borrowing activity. So, it looks like it’s coming both ways. So, is that really a turning point in the sense that we really see demand? Whether it’s cash, whether it’s borrowing, people are really keen to make a move? 

SM: Yeah, I think that’s the right question. And my easy answer is to just say, well, it’s too early to tell, which I suspect you won’t let me get away with. So, here’s a few places we can look to try and inform that answer. 

We can look at the Swiss property market, actually, I’ve been looking at that for a while, and, to a lesser extent, the eurozone, for clues as to what will happen when interest rates reach a certain point.  

The Swiss property market is much smaller than the UK, for sure, and the economic outlook is different. However, similar to the UK, it has a rich diversity of property types across so many different locations and values across the country. It has a domestic population that for a time were priced out of the market. And lower interest rates, coupled with a correction in prices has effectively restarted the mortgage market and the domestic population is now back on the move. That’s brought rental costs down as well.  

So, that’s one really good clue. And I think very interesting to see what we might see in the UK, certainly at a thematic level. Additionally, I was at a private bank roundtable recently with some similar folks to me in terms of credit real estate specialists and the magic number being gravitated to was an all-in pay rate. So, that includes the bank’s margin in the BoE, but an all-in pay rate of around 3.75%, representing a tipping point for high-net-worth borrowers to see value in ramping up leverage.  

And, of course, that’s just a sentiment survey. That’s just an idea of where folks think that might gravitate to, but there’s no denying that interest rates will continue to play a key role, and as those begin to come down, so in the UK, will represent a tipping point for folks to start leveraging. 

I’m really excited by that, by the way, because if I look at the value of London transactions above £5 million, let’s say this year and let’s say 2024 as well, but we can probably look a little bit further than that, but there’s probably something like £2 billion worth of latent lending that’s there. So, that represents a really interesting opportunity in the marketplace and I’m almost sure will materialise in demand and will, of course, grow in size until we reach that pivot point. 

JL: Well, look, I’m never going to blame you for saying it’s too early to tell. I myself am guilty of using that sentence way too often, but sometimes it is really too early to tell. Now, since we’re talking about the UK, last week the Bank of England cut interest rates once again 25 basis points (bp) to 4.25%. That was as expected.  

However, the decision, the vote split was a bit more hawkish than expected. We had a 2-5-2 split. Two people voting for a hold, five people voting for a 25bp cut, and two people voting for a more significant 50bp reduction in the bank rate. 

We also got some interesting updated forecasts from the BoE, projecting peak negative impact of tariffs of around 0.3% of GDP within three years. Again, I would really take those numbers with a pinch of salt. Growth was revised upward for 2025, that’s the good news, and it’s now projected to be 1%, up from 0.75%.  

The not so good news was that the 2026 figure was revised lower from 1.5% to 1.25%. More encouragingly, we also saw the BoE revise lower its inflation forecast with the target being in sight and possibly achieved by the first quarter of 2027.  

So, a lot happening in terms of BoE forecasts, change and lower interest rates. You briefly mentioned that you continue to expect interest rates to come down. So, I’m going to be borrowing money soon. Should I wait? Should I expect fixed rates to come down in the UK? 

SM: Well, OK. So, yes, they’ve been coming down and you’ve picked the right week to have asked me. The UK retail mortgage market has seen fixed rates coming out that are sub-4% headline rates, but that’s the exception not the rule at the moment. But definitely a trend that we’re seeing. The Bank of England base rate is still above 4%, but the GDP swap rates, which inform the price of fixed rates, are now the lowest they’ve been all year, and the lowest they have been since around October last year.  

And, for the first time in a few years, the two-year and five-year swap are converging on themselves. And really that’s an indication that the market doesn’t see that short-term volatility continuing at the current moment. 

But, as I say, every time you ask me this question, we’ve been here before, and those fixed rates remain really sensitive to any negative inflation sentiment or the market unknowns being driven out, and I guess geopolitical turbulence has been the big one.  

The 12-month spread on the five-year swap has been close to 100bp peak to trough, the two year about 70bp. So, as you can imagine that’s massive when teams like my team and other lenders are trying to price fixed rates. And even this morning, hot off the press, we’ve seen what we thought was the market overegging that 50bp drop at the BoE last week, and the swaps have come up just a little bit over the last few days.  

And, as you say, there is a huge health warning. The OBR is signalling an inflation rate of 3% to 4% in the summer months driven by the Government budget impacts being felt. I’m thinking about all that business, National Insurance, or the school-fee VAT, the energy price cap going up I think by just over 6%.  

So, you know, we’re led to believe, by Andrew Bailey, that it’ll be temporary over the summer and, you know, as we get into the back end of Q3 and Q4 things will be back on that normal road again. 

I think in 2024 if I was a BoE rate setter, I was preoccupied solely with inflation, and we’ve obviously had that conversation lots of times, I’ve now had to become more preoccupied with economic growth and preventing the risks of recession post, you know, ‘Liberation Day’ and post the UK budget. So, many commentators, including us, seeing the UK terminal rate at about 3.5% as early as the end of Q4 and, again, that just dovetails into a lot of what I said around reaching that pivot point and whether that will be this side of the year or next side. 

JL: Great. Excellent. Look, we’ve covered a lot and I’m sure there is tons more than we could cover. Anything else on your mind? Any last minute thoughts from you and the team on things to keep an eye on maybe? 

SM: Well, I think the big one is the Labour Government’s Renters’ Rights Bill. I’ve briefly mentioned that a few times and perhaps we’ll spend a bigger podcast on it as it comes to fruition. But that’s moving through the House of Lords at the moment and, as expected, there’s been a huge amount of debate at the committee stage. I think something close to over 200 amendments being suggested and whether it’s an argument about striking the balance between tenants and landlords and some peers saying it hasn’t gone far enough, other peers saying that there are too many loopholes. 

And really the biggest debate, which nobody saw coming, which underlines the fact that we’re a nation of animal lovers was one about pets and, you know, believe it or not, what rights cats have in terms of landlord provisions and renter provisions. So, that got a huge amount of floor time. So, it’s really proving that bits of legislation that the Government is trying to push through will have various debates around it, but the Renters’ Rights Bill it’s not a matter of if, it’s a matter of when that will come through. 

And some really interesting things there that we can talk about specifically about price value in the market in terms of rental properties and at what point that becomes something that landlords need to think about when they’re buying prime and super-prime London. Really, above £5 million only 1% of properties caught within that, and then when you’re sort of between £2 million and £3 million there’s a lot more.  

So, it’s something that will need to be understood in detail and will probably represent a little bit of opportunity at a certain price point, but we can talk about that in greater detail another time.  

We’ve got the next BoE policy meeting mid-to-late June. Obviously, all eyes on the decision there. CPI around 21 May, and then really looking at the spring numbers in terms of transactions, listings and prices being agreed above and below asking price. That’s all very interesting as we start to come out of the spring market and all of that data becomes available for the summer. 

JL: Excellent. We’ll get you back before the summer so you can tell us all about those spring market numbers, and hopefully we can debrief together the BoE decision in June. Thank you so much for joining us again today, Stephen, always incredibly interesting especially when, like me, you are contemplating the purchase of a home. 

In terms of what to look for, to wrap up this week, a few datapoints. We talked a lot about inflation with Stephen. We’re going to get inflation data in the US for the month of April, maybe the first time we’re actually going to see the impact of tariffs. The US CPI will be released and the consensus is looking for the headline and core to basically be relatively unchanged on a year-over-year basis, at 2.4% and 2.8% respectively. 

We’ll also get the US retail sales and see if the consumer is still spending. Probably the most important datapoint will be the producer price index because this is where any impact of tariffs will filter through first. That will be out on Thursday. 

And, finally, some data on US consumer sentiment with the University of Michigan report. And we’ll also hear from a slew of Fed officials that will deliver remarks after the Fed decision last week. 

We’ll be back next week to debrief all that, of course. But in the meantime, as always, we wish you the very best in the trading week ahead. 

(end of recording)