Markets Weekly podcast – 18 November 2024
18 Nov 2024
Real estate special and US jobs
12 August 2024
What could the Bank of England’s recent interest rate cut mean for UK homeowners? Tune in as Stephen Moroukian, our real estate financing specialist, discusses the health of the housing sector for the remainder of 2024. He also covers the new government’s property pledges, mortgage approval rates and potential opportunities for international investors.
Meanwhile, podcast host Julien Lafargue examines US employment data, the most recent decision from the Bank of Japan and the second-quarter US corporate earnings season.
You can also stream this podcast on the following channels:
Julien Lafargue: 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.
Thankfully, markets are behaving, so we’re back to our original programming, and I will be joined by a guest today. We will be talking about real estate markets with the person who, if we believe our listenership numbers, is the most interesting of our guests, and that is Stephen Moroukian, Product and Proposition Director for Real Estate Financing at Barclays Private Bank and Wealth Management.
So, let’s talk about last week. Well, if you’ve been on holiday and you haven’t checked your Bloomberg screens or your portfolios for the past week, you will notice that the S&P 500 is flat on the week. So, it looks like nothing has happened, but the reality is it was a real rollercoaster for equity markets.
Ultimately, they managed to recover from Monday’s sharp sell-off. The Nasdaq ended the week down 0.2% after being down almost 6% at the open on Monday. As I said, the S&P 500 was roughly flat for the week while the EURO STOXX 50 managed to record some gains, finishing the week up 0.8%. In fact, even the Nikkei 225 in Japan ended the week down just 2% after being down more than 13% for the week on Tuesday.
So, the aggressive selling that we saw at the beginning of the week was arrested by soothing BoJ rhetoric and the latest ISM services, as well as the US weekly jobless claims report, which showed that the US labour market is far from imploding.
So, what did the BoJ say? Well, Deputy Governor Uchida said that the central bank won’t raise interest rates if markets are unstable, and they have been recently. And that was taken positively by markets, as a sign that the BoJ won’t do anything else for the time being, and that helped to support the Japanese carry trade that we have talked about.
Now, if we look on the US side, the July ISM services printed at 51.4. The consensus was looking at 51.0 and that was a sharp improvement versus June (48.8). Maybe most interestingly, within the detail of the report, the employment index expanded for the second time this year, rising to 51.1. That was from 46.1.
Again, a strong sign that US employment, especially on the services side, is not collapsing, which is something that markets were really concerned about a couple of weeks ago and that partly drove the sell-off that we’ve experienced earlier last week.
Aside from that, we also heard from a few Fed officials, and they all pushed back against this talk of recession, signalling that the rate-cutting process would commence in September and, therefore, putting to bed any call for emergency cuts, which we heard earlier last week, some people even calling for 75-basis points of immediate cuts.
Apart from this, it was a relatively quiet week on the macroeconomic front and that’s ahead of two important releases in the US this week on the inflation front, the PPI and the CPI. A quick word on earnings as we’re coming to the close of the second-quarter earnings season. The S&P 500 companies reported earnings growth of around 10% year over year. The beat-to-miss ratio is around 78%, which is in line with historical averages. And the surprise factor, ie, by how much those companies that have beaten have actually beaten estimates, is around 4%, which is slightly below what we’ve seen in the past.
But, as always, with earnings we need to look forward and we need to hear what companies have to say about the future, in the form of the third quarter. And there, things are actually not too bad.
Eighty-six companies within the S&P 500 have issued EPS earnings guidance for the third quarter, and 55% of them, 55% out of 86, have issued negative EPS guidance, ie telling the markets that their Q3 earnings will be lower than initially expected. And that 55% is actually lower than what we’ve seen in the past, suggesting that companies are aggressively cutting expectations.
Now, this is good and bad. It’s good because it means that the economic momentum is not deteriorating extremely quickly. It’s bad in the sense that it sets the bar slightly higher for Q3, and companies may want to revise earnings expectations lower, as we approach the reporting season for the third quarter, so that would be in October or so.
We’ll see. But, so far, I would say that this earnings season was OK. It maybe doesn’t feel this way from a price-reaction standpoint, but from an earnings standpoint, as we know that earnings are the key driver of equity upside over the long term, from an earnings perspective, things are fairly decent.
Now, where does that leave us? Well, the fundamental outlook has rarely been so muddled. Not only that the macro and the micro pictures are telling different signals, the macroeconomic landscape itself is quite noisy these days.
Thankfully, some of the most acute technical imbalances seem to have been resolved by the recent pullback, yet we are still far from the all-clear. So, our message would be to proceed with caution and to expect volatility in the coming weeks. We’re also going to get another read of US initial-jobless claim this week, which could bring some volatility.
But there are some bargains to be found in this market, and our bias is more to look for those rather than to run for the hills, clearly.
Now, that’s it from a market perspective. Let’s move on to our guest segment with Stephen.
Stephen, it’s great to have you back on the podcast, always very interesting to hear your thoughts on, probably the main asset class for many of our listeners, that is real estate. And I guess the first question for you has to be around the Bank of England’s recent interest rate cut.
So, what do you think it means for the mortgage market, and how can we expect this to play out for UK borrowers?
Stephen Moroukian (SM): Hi, good morning, Julien. Great to be back. So, the recent cut in the Bank of England base rate. Here’s a quick reminder for our listeners. For any mortgage borrowers on variable rates, which track the Bank of England base rate, then they will see a drop to their mortgage payments. Twenty-five basis points won’t move the needle much but, and in fact on the average mortgage in the UK is around a £60-to-£80 reduction per month. But, of course, if this is the start of the cycle, and as those reductions ramp up, it should continue to ease the impact.
And if you think about all of that accumulated value across multiple base cuts and millions of borrowers on tracker rates, that really starts to move disposable income back into other parts of the economy. For fixed-rate borrowers, there’s two types of fixed-rate borrowers at the moment, those locked into fixed rates at historical lows and those that are locked into the recent highs, and neither will feel any impact, of course, of any base rate change in their term.
And the important aspect to remember is that the future swap-market rates, which ultimately help to set fixed-rate pricing, have returned to levels we saw in January this year, and then again in April 2023.
So, we’ve been here before. I do remain cautiously optimistic about where fixed rates are going, and my optimism comes from two differences, I guess, that we didn’t have in the previous windows. The first, and most importantly, is that we have a Bank of England base rate cut and a narrative from rate setters, which allows us to form a bit of a view over the next three-to-six months.
And secondly, we finally have got a sustained drop to those stubborn inflation numbers. And look out later this week for the next published figures from the ONS. And for mortgage pricing, that means we’ll likely see a return to what the media have coined as a mortgage price war by the big UK lenders, as they jostle for market share in a market that’s undoubtedly shrunk, and I expect the sentiment and the headlines to play out to that for the next three months.
So, for people I speak to, I think the 3%-pay threshold on a fixed rate is a significant psychological number. We’re at least 100-to-150 basis points away from that, and that will be a meaningful milestone if and when we get there. And, as you rightly said last week, Julien, we’re all connected, perhaps too connected to all these emerging datapoints like we saw on nonfarm payroll recently, and how they dramatically get translated in the market in the blink of an eye.
So, dates for your diary, for the BoE 19 September and 7 November, and, of course, the latter dovetails with the days following the US election, so I think it’ll be an incredibly busy week for all of us, I’m sure.
JL: Yeah, and, look, I can testify. I’m in the process of remortgaging myself, and this is a process that has been going on for more than a month now, and I can tell you that I’ve already received new offers that are slightly lower. So, we’re on the right track and have to wait for rates to go even lower than that.
But with that sentiment around, or expectations around the rate dropping potentially further, what do you think this will do in terms of bringing more buyers and borrowers to the marketplace?
SM: Yeah, OK. Well, look, a reminder for our listeners. Again, the number of mortgages approved for the purpose of purchases on a monthly basis is a critical datapoint, I call it the ‘canary in the mine’, on the health of the property market and the mortgage market in the UK, the three-year average is around 70,000 approvals per month, with a COVID-19 backlog peak of around 110,000.
We saw lows of around 30,000 to 40,000 approvals in late 2023, and that all spooked us a little bit, got us a little bit worried. We’ve stabilised at around 60,000 over the last few months and that’s OK. I think we’d all like that number to be about 10,000 approvals higher and I’m convinced, once we get to those interest-rate reduction milestones, those types of numbers are realistic.
Similar to you, the UK will also see 1.5 million mortgage borrowers roll off fixed rates this year, which will see remortgage and refinance applications spike. We also predicted mortgage-porting applications would increase, and this is a little-known capability many mortgage borrowers have to their residential mortgage, where it can be moved to another property on a like-for-like basis.
Certainly, conversations I’m having with friends, colleagues and clients is how to keep the same, or similar, levels of lending in place but change the property location, and, therefore, the size and footprint to better serve their evolving needs, whether that’s downsizing to a pied-à-terre in London, or move to a more substantial home in Greater London, or even further out.
JL: Great, OK. So, that’s on the rate bit. I think another major thing has happened since we had you last on the podcast and that is, of course, the UK general election and the Labour win. Can you give us, from your perspective, what are the key impacts of this new government? Anything related to property, housebuilding, mortgages to flag?
SM: Yeah, absolutely, it’s a great question, Julien. Despite everything we’ve just discussed that’s going on, the incoming government has stated a very, very long list of things it wants to achieve in relation to property.
So, I guess, in no particular order, we’ve got local government targets on new housebuilding, including a potential political third rail of green-belt construction. But also, speeding up and making the planning approval process, which can be incredibly inconsistent between councils all over the country, faster and more efficient.
Last time I was here, I was sharing that Rishi Sunak had pulled back from his commitment. Labour has pledged to bring this back by 2030, but where this lands in terms of detail will, you know, remain to be seen.
There’s the Renters (Reform) Bill, which was parked in the last government’s ‘wash-up’ days. This will be rebranded as the Renters Rights Bill, and I imagine some changes in that as well.
An additional 1% stamp-duty surcharge to the existing overseas buyers’ rate. That’s a real tightrope between deterring and attracting overseas capital. The mortgage-guarantee scheme, which was relatively successful, being recast as the freedom-to-buy scheme, with the ambition to help 80,000 first-time buyers get on to the property ladder, and a review of the leasehold regime in there also.
Changing the stamp duty nil-rate band back to 300k from 425k and, I guess, lastly, a close eye on any property flavoured aspects in inheritance tax and capital-gains tax in the upcoming budget.
JL: All right. That feels like a massive to-do list, and I’m sure that we’ll hear more about all those things. If you had to point to one as the biggest challenge this government will face, or the biggest challenge for your sector, the real estate sector, what would that be?
SM: Well, I think there’s the old saying, isn’t there, about campaigning in poetry and then governing in prose, and that might be the way it goes. And if that rings true, then the easiest items are probably the ones that are already in existence, or have existed in some way, shape or form, like the Renters Rights Bill, like the EPC restrictions, and anything aimed at getting those mortgage numbers up, like the freedom-to-buy schemes. So, to get a few runs on the scoreboard earlier will probably make sense.
I think, in terms of the tougher jobs on the list, we still have a deficit in the UK of around 300,000 new homes a year that have to be built, and that has never really been solved by successive governments. But actually it was Tony Blair’s second and third ministries that saw consistent delivery for those numbers, around 200,000 or marginally above of new dwellings, which substantially fell off a cliff subsequent to the global financial crisis.
So, local authorities and housing associations have really struggled to get those numbers up over the years that then followed. So, it makes sense that mobilising that from a low base will be a good place to start.
The government is pledging to build 1.5 million new homes over the next five years, and if you think about it, that’s the 300,000 magic number per year. And, in order to make that happen, one of the biggest challenges is green-belt planning and how that’s considered.
For our listeners, a green-belt area is one of the vast pockets of underdeveloped land across the UK, with surroundings around London, Manchester, Birmingham, Liverpool, just to mention a few. There’s a lot of it about. They’re heavily restricted in terms of what development can and can’t be done.
Labour is terming a new phrase, called the grey belt, which is currently officially undefined, but will look to reclassify lower-quality parts of the green belt for more favourable planning applications. Add to that the amount of effort that’s needed in the value and supply chain, think about materials, labour, especially. We got a taste of that during COVID-19 and what that did to drive the inflation costs for material and labour was stark.
So, in those sectors, investors are already thinking about where the value will be driven. So, look, it’s going to be technically complex and it’s going to be an emotive process, so no doubt it’s definitely one to watch on the government’s scorecard.
JL: Yeah, I don’t recall hearing a government saying that they won’t build more housing stock. We’ll see. Anyway, we’ve talked a lot about the UK. Let’s broaden our horizon a bit and, you know, today is likely to be one of the hottest days of the year in the UK, and I’m sure a lot of people are on holiday at this point.
We’re, you know, exposed to the global real estate market. What can you tell us about what’s happening outside of the UK at this point in time? Where should we be thinking about maybe investing property wise?
SM: Yeah, well, it’s perfect timing, isn’t it, Julien? So, and I guess this one’s probably close to your heart as well, but the French Riveria, in my view, is having a really interesting time at the moment. We’ve spoken about this a lot, and I’m asked to comment on this market very frequently at the moment, so it’s definitely captured a lot of attention.
The region experienced a once-in-a-generation boost from the race for space or the race for sun, or the race for sand, whichever you choose, during the COVID-19 window. You saw regional, domestic and international migrants add the French Riveria to their list of places to live and work.
This placed enormous pressure on local stock levels, seeing all the tell-tale markers of property sales and rental price increases and spikes, which has only really been tamed by the rapid increase in interest rates finally taking the heat out of the market. And, of course, the ECB has been, you know, far less volatile than the Bank of England.
But in a post-COVID context, a lot of those folks have been able to continue to live-and-work remotely in the region. And that’s a real mix of people. So, that’s Parisians who have got now no intention of returning back to Paris and are making hybrid work very well. It’s not an easy commute, of course, but if you’re staying in Paris a few days a week or a few days a month, then it’s very well-connected by rail and air. There’s lots of UK expats and lots of UK business owners who are using it as a hub.
And then those much further afield, including the Middle East and the United States, who are taking advantage of its geographical position. If you think about that North Atlantic corridor, it's also very well served by airport connections.
And, of course, the fabulous dollar/euro advantage that’s been in play over the last few years has come off a little bit compared to where it was in 2022, but if you compare it to where it was this time 10 years ago, you know, it’s in good shape if you’re in dollars looking to buy something in euros.
Nice’s tech hub, which, in hindsight, was just a great bet on its future, is doing very well. It’s a little bit tired. It’s being reinvested in but, you know, thousands of businesses, small and large, are located there. It’s got obvious connectivity to regional hubs, like Monaco, and we know and operate there of course.
It makes it a really in-demand location, with property mixed as well, both in terms of the types of property that’s available but also its price. It’s a more modest €5,000-to-€10,000 per square metre versus the dizzy heights of Monaco, where the numbers are anywhere between €50,000 and €100,000 per square metre, depending on quality and location.
So, I think it’s a really exciting region in terms of the story over the coming years.
JL: That was an amazing pitch for the French Riviera. I’m wondering if you’re looking to relocate there, are you? Or maybe you’re going to take your holidays there?
SM: Well, from the French Riviera to the beautiful east Sussex coastline of Camber Sands, that’s where I’m looking to spend a few weeks in a couple of days’ time. And I’ve looked at the weather, Julien, and it’s 28 degrees down there, which is great, but obviously it’s hard for me to go anywhere without looking at property, and there’s some interesting homes down there, including some picture-postcard medieval townhouses in Rye, near the castle, if our listeners know it, starkly contrasted by the post-apocalyptic nature reserve of Dungeness.
Again, a really interesting place, incredibly expensive, single -level wooden houses set in a stark landscape. Very difficult to buy, a retreat for artists and those looking to escape the Big Smoke, so well-worth checking out and that’ll be me for the next week or so.
JL: Excellent. Well, look, I hope you enjoy it. Thank you very much for that comprehensive update. We’ll get you back after your holiday so we can get a full report of the real estate market.
All right. Before we conclude, a few things that we need to keep in mind this week, in terms of the Fed releases I mentioned already. The US PPI and CPI, so that’s Tuesday and Wednesday. And we’re also going to get the retail sales for the month of July, that will come on Thursday.
Closer to home, in the UK, the unemployment data is going to come out on Tuesday, some inflation readings on Wednesday, the CPI and retail sales on Friday. And, of course, we will also get the US initial jobless claims. That will be on Thursday and that will, for sure, be likely closely watched.
But we’ll be back next week to debrief all that, of course, and we may take a small holiday break after. But in the meantime, as always, we wish you the very best in the trading week ahead.
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