Markets Weekly podcast – 11 November 2024
11 Nov 2024
What could the UK Budget mean for property markets?
21 October 2024
Tune in as Stephen Moroukian, our real estate financing specialist, reflects on the recent mortgage market price war and the upcoming UK Budget. Meanwhile, host Julien Lafargue discusses the outlook for China, the latest crude oil prices and interest rates in the eurozone.
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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.
As usual, we’ll first go through the events of last week, before welcoming a guest speaker. And this week, I’m very happy to be joined again by our real estate guru, Stephen Moroukian, to discuss everything real estate.
But before that, let’s look at the week that was. It was a fairly busy week, even personally, where I just welcomed a daughter. So, not much sleep, but still I managed to keep an eye on markets while I was awake at night. And it was a fairly muted week, although a lot happened under the surface.
In terms of market action, we’ve seen US equities, as well as the FTSE 100, outperform, whereas Europe, as well as emerging markets, trailed. And one reason for that is we got some mixed earnings in Europe, as well as some profit taking in Asia after the strong rally that we’ve seen over the past few weeks.
In Europe, the issues came from two main companies, LVMH and ASML, which both disappointed expectations on their Q3 earnings report. Both companies decided to blame China for their poor result. In the case of LVMH, it was around consumption, and in the case of ASML, it was around demand for semiconductors. While AI is still doing pretty well, the more basic semiconductor demand is still lacklustre.
Beyond that, we also got some news from China. I said news, but it wasn’t really anything new, in fact, and that was a bit disappointing for markets. We had a press conference from the Minister of Finance over the weekend, last weekend, and market participants were expecting some kind of update, especially when it comes to the implementation of the stimulus package that had been announced. And the Ministry of Finance didn’t say anything new, really, just reiterated the commitment of the Chinese authorities to help propel growth higher, or at least to promote some kind of recovery.
Now the market was expecting some kind of announcement. The reality is it doesn’t really work that way in Chinese politics, if we can call it that. The reality is that the Minister of Finance is not the authority that is able to really announce any new package, or at least not the size of it, as it needs, first, to be approved higher up in the chain, so the market expectations were probably misplaced to start with.
That said, markets continue to expect further announcements from China, and any time that Chinese authorities decide not to give more detail we could expect to see some kind of move lower.
Now finally, in terms of last week, closer to home, in the eurozone, was of course the ECB. The ECB decided, as widely expected, to cut interest rates by 25 basis points. The message of the central bank didn’t change much. It remains pretty much data-dependent and Christine Lagarde stressed that it’s not datapoint-dependent, ie encouraging investors not to read into every single data point, but rather looking at the big picture. At this stage, it looks pretty much guaranteed that the ECB will cut once more in December.
Now, the key question is: will the ECB continue with its 25-basis point cut run rate, or will the central bank decide to accelerate a bit, maybe mimicking what the Fed has done, ie 50 basis points. And the market, at this point in time, is 50/50 between those two scenarios, with a bit more than one cut being priced in for December.
Those things can change quite quickly. We have, of course, a US election, so we’ll see. We’ll see what happens, but, clearly, the European Central Bank should be bringing rates lower over the next few months, and potentially few quarters. We think they might stop once they get to 2% only.
Last, for last week, a quick mention of oil simply because we’ve seen quite a significant move. The oil price was down some 8% last week. And I guess this is just a reflection of some geopolitical risk premium being removed, after talks, rumours, press reports, however you want to call them, suggesting that Israel wouldn’t attack Iran’s oil and nuclear installations. There was some expectation that Israel could retaliate to Iran’s latest attack by targeting specifically Iran’s oil installations, which, of course, brought some risk premium to the oil price.
It looks like Israel is not, at least at this point and based on those reports, looking at this type of retaliation. We will see, but oil was lower on that news.
Overall, it does feel that the fundamental picture for oil is not great at the moment, given how weak China is in particular, but, of course, this is probably the asset class that will respond the most to any flare-up in tensions in the Middle East, the other asset being gold, which, again, is at an all-time, above $2,700 per ounce as we speak.
Now, that’s it for the week that was. Let me now turn over to our guest Stephen Moroukian.
Hi, Stephen, welcome back to the podcast. You’re always one of the speakers that our audience prefers to hear, because you’re talking about something that everybody thinks about, real estate.
So, since you last came, I think a lot has happened, actually, and if I remember correctly, last time you were here with us you talked about the possibility of seeing more elevated activity in the mortgage market, and we’ve seen a lot of headlines last week around new rates, and rates being pulled.
I actually remortgaged recently and three times, I got offered a better mortgage rate by the same provider, before I signed up, and then as soon as I signed up, I was lucky, the rate went up again, so it’s going all over the place, it looks like. Maybe can you start by explaining to us what’s going on in the UK mortgage market?
Stephen Moroukian (SM): Yeah. Morning, Julien, and great to be back, thank you. Congratulations on your latest arrival, or arrivals should I say, both your interest rate and your family.
So, yeah, let’s pick up the story from August, where we saw significant reductions in the market outlook for short- and medium-term fixed rates, and this resulted in some headline-grabbing rates, at sub 4%. There’s a reason why all of that’s important. As a reminder to our listeners, prior to 2023, 90% of all UK mortgage borrowers took fixed rates, and that’s really important to remember, and took them at an average of 2%, 2.5%.
And, as all of those borrowers have started to mature off those rates, and it’s about one million borrowers a year, give or take, over the last two years, and over the coming two years, so the need to lock in the very best deal, as you’ve seen yourself, and the real life impacts that has, in terms of the rate hiking we’ve seen to people’s household budgets, you know, all of that stuff comes into sharp focus, so really important stuff.
The market rates used by banks to price fixed rates in the UK have fallen to the lows we saw in January this year, and again in March 2023, just before the true reality of the inflation outlook had fully played out. So, there were two windows of time where two- and five-year mortgage rates were sub 4%, and borrowers that timed this well, probably through luck rather than judgement, enjoyed those dips. And there’s a little bit of that playing out right now.
And we’ve seen a wave of sentiment on the lower BoE outlook, some of which has been projected, as you’ve said before, by the central bank itself. However, the market rebounded from the fall, with the two- and five-year future swaps showing a spread of nearly 50 basis points in a five-week window, which, in turn, saw banks reprice, then remove their fixed rates.
And if we bring that story right up to date, the much-awaited inflation numbers from the ONS were published late last week, and saw a fall in core inflation from 2.2% in September to 1.7% in October, and we haven’t seen those sort of numbers since 2021.
So, we now have clear water under the Bank of England’s inflation target and it really paves the way, as you say, for a rate cut in November, and possibly December. And I always say, look, we’ve been here before. But actually, this time, we’ve not been exactly here before, so I think that feels like a slightly different chapter we’re entering, if I’m being an optimist.
JL: All right. You’re talking about rate cuts in November and potentially December. I would agree that this is the most likely scenario. That said, we have a small detail, well, two. One that is not UK specific, which is the US election, but we also have, very soon actually, the UK Budget, and that could maybe change the market forecast in terms of rate cuts.
And I remember last time you came on to the podcast, we discussed a bit about all those various policies that were potentially going to be included in this Budget update. We’re now closer to the official announcement, so any more clarity? Do we know a bit more, than we knew back then, as to what’s going to happen from a real estate perspective?
SM: Yeah, that’s right. And, look, the list has got longer and more detailed since we last spoke, so we thought it’s probably a good idea to go through these in a little bit more detail, given we are so close, as you say, now. So, Wednesday, the 30th, about 12.30, Rachel Reeves will start speaking, and for us, in the property and mortgage industry, we’ve had a lot to think about and consider.
So, if maybe we start with landlords. It’s been a hard time to be a landlord, with interest rate impacts not matched by rentals, and now a few more points for them to consider. The first is the Energy Performance Certificate ratings, or EPCs as they’re known. Rented property will need to be C-rated or better in 2025 for new tenancies, and 2028 for existing ones, and a version of this is in place today. However, the jump from a C rating captures nearly three million properties in the UK, and wild numbers, like close to £30 billion, in landlord spend needed to meet these targets, and the concerns that being a landlord, you know, is challenging and that they will be driven out of the market and sell up before these costs start to come through.
It’s more complicated than that. There are caps on the amount one needs to spend depending on where the property is. There’s also a variety of government grants to consider, and then an application for an exemption. So, all this is quite complicated, which is then only really valid for about five years. So, landlords really need to do a lot of homework right now, and it will be complicated to implement.
Added to that, there’s the Renters’ Rights Bill, which the Labour Government has taken the previous Government’s Renters (Reform Bill), and these included a variety of measures which, very rightly, looked to ensure that sub-standard properties in the UK are chased out of the housing stock, and also includes a list of provisions, which do fundamentally shift the balance of weight from landlords to tenants, including items like rights around arrears payments, no-fault evictions, an Ombudsman to investigate complaints and rights around things like pets and decent home standards. So, this is a fundamental shake-up, some of it frankly well overdue.
However, a real challenge against landlords, as the sector kind of works through all of these changes. And ultimately, if properties and landlords leave the rental sector, then there will be ultimately less supply and more competition for those properties. So, definitely one that the government will have to think quite carefully about how it implements.
And that takes us to tax, quite nicely, and there’s four big ones for property: inheritance tax, IHT, capital gains tax, CGT, stamp duty and, of course, the VAT on school fees. And all of these are leading to various interesting conversations, debates, lobbies, and even action in the market already.
So IHT and CGT are not real massive drivers of income for the government, so anything that comes through may look to adjust thresholds or caps to capture more in scope property disposals, and perhaps where parents have been gifting money to their children for property purchases. So, they’re the sort of things I’ll be looking out for.
We’ve seen a spike in properties coming onto the market in the prime space, as the view on CGT raising from around 24% to perhaps 40% is getting a few buyers to try and execute sales in an unrealistic timeframe, in terms of disposals, so that’s on people’s minds.
I think stamp duty, there’s currently no stamp duty levied on properties up to £250,000 in the UK and £425,000 if you’re a first-time buyer. There’s strong sentiment, and it’s sentiment only at this stage, that that may come back down to £125,000, which for first-time buyers who, you know, have seen the average property in the UK increase by about 4% or 5%, it’s about £9,000 when you think of a transaction-by transaction-level, that’s a meaningful number. So, again, how will the market look to absorb that.
And then school fees, you know, VAT on school fees, a few interesting things that may play out. The first is downsizes. Those who will take equity out of their homes by selling and moving to, perhaps, more convenient and different locations and really manage properties in order to reduce their overall cost burdens, and targeting, perhaps, even areas that are outside of the private sector, and certainly seeing locations like south-west London increase in popularity. Demand for family homes, in that particular, has gone up over the recent months and perhaps that’s related to this particular piece coming through.
In addition, you know, perhaps, we’ll also see those who will take equity release out of properties and leverage, and use that leverage to cover some of the increased VAT burden. Again, 4%, 5% remains very modest in terms of the overall cost for borrowing. And that sort of covers kind of the tax angles.
And then housebuilding, you know, that’s the bit that’s really, really important. We know that the government has committed to building 1.5 million new homes over the next five years in the UK. And since that statement has been released, there’s been a lot of reflection on where that will come from, how it’s possible, a view on materials and labour costs and also the latest narrative around actual demand. You know, if you put that many new homes into the market place, is there actually sufficient demand to be able to absorb all of that? And what does that look like in terms of location, in terms of price point, in terms of local authority support for delivering those, and councils playing a critical role in that?
I mean, in the UK today there are close to around 700,000 empty homes already, 250,000 of those are empty for over six-months a year. So, perhaps that’s an indication of where items like what the properties are used for, where they are, and who can afford to get access to them will have to be considered before, you know, a big housebuilding exercise happens.
And as I said, in terms of materials and labour, it’s a huge burden that will have to be picked up. Who’s going to pick that up, what are the costs of that? So, we’d like to see a bit of detail come through next week about what that could look like. And that includes items like planning, and this is around really the greenbelt areas in the UK, where it’s very difficult to get planning permission and there’s this new term that’s been created called ‘grey belt’ which is still being defined, and really is about areas of land where, perhaps, they’ve fallen into sort of a planning grey zone and could represent an opportunity to get favourable planning permission, which would result in building new homes on those particular sites. So, an expectation that planning might become a little bit easier.
That’s a little round-up on all the things that we think we’ll see next week, so there’s a lot for me to keep my eyes and ears open to.
JL: And I guess all that means that we’re going to have you back on the podcast once we get all the details. Well, look, one of the main reasons we want you on the podcast anyway is to know what you think house prices are going to do in the near future. That’s very much of interest to everybody, so maybe given everything you’ve said about supply and demand, the upcoming Budget, where does that leave us in terms of long-term pricing and maybe pockets of opportunities?
SM: Yeah, OK. So, I’ll give you a few views, and, obviously, if we could all predict house prices then we’d perhaps be doing something very different. But the forecasts over the last few years have been very modest and, in fact, have been, in pockets, quite negative. There have been some sentiment indications around a cataclysmic price collapse, of anywhere between 10% and 20%, or 30%, and obviously none of that had played through.
Some of that was curtailed by government action around things like the Mortgage Charter, which provided a safety net to UK mortgage borrowers. And, of course, the higher interest rate environment at the very top end of that spike being relatively short lived. And, of course, affordability rates, when it came to mortgages, especially in the UK, being well absorbed and meaning, really, that households were able to weather some of those storms a lot better than had been predicted.
And I think most forecasters remain fairly positive about the next five years and, clearly, the further out you go in terms of that forecast, the greater risk there is in that forecast being accurate, in terms of consideration. And I think over the next two, three years it’s likely that the recovery that we’ve seen over the last 12 months and, just to put that into context, average house prices in the UK are now pretty much almost back to where they were before we had the ‘mini’ Budget hiatus, and that really indicates that the ground that had been lost has now been recovered. So, that puts us back to a relative baseline.
Now, of course, the pockets of stories, whether that’s prime-central London, whether that’s prime rural, whether that’s prime regional and prime coastal, whether that’s the UK market as a whole and some of the regional variances around Scotland and parts of England in the west and south-west, you know, all of that is completely varied. And really one of the core themes that’s playing out, that a lot of forecasters are thinking about, is the post-pandemic context. And really that means the pendulum swinging back for buyers, gravitating back to locations where you can think about a combination of factors which make it much more likely that there will be higher demand. And, of course, higher demand means the likelihood of higher prices, and that higher demand also has the ability to buy and execute.
So, typically, affordability levels are quite good and there is either a local market to sustain that or a market that is coming into those areas to drive that forward. So, if we think of areas where there has been, perhaps, an increase in migration because of work, so typically where there is a university, there’s a university hospital, there are schools, there are industries that are gravitating to an area, you know, you can think about places like London as the obvious example of that, but there are pockets around the UK that have been really benefiting from that post-pandemic swing of saying, OK, well, I don’t need to be in London all the time, maybe two- or three-days a week, you know, can I get there very easily from a commuting perspective, but, at the same time, still work from home, have very good technological infrastructure, and, at the same time, locally there is a strong foundation of industry and community?
And you can think of places like Bath, Bristol, Exeter, Oxford and Cambridge, Edinburgh, you know, those are cities that have done very well over the recent few years in terms of value increases and popularity for both families, young professionals and those perhaps looking to retire. So, that’s very interesting.
I think there’s a demographics story in the UK that isn’t told very often. I try and tell it whenever I’m with clients and colleagues, but in 2014 we had a birth spike in this country, which was really a legacy of the global financial crisis and families putting off having children until that particular window of time had sailed out, and because of that, there are around 25% more 10- and 11-year-olds than there are the year above and the year below. And that has had an impact through various infrastructure requirements through the UK over the years.
But that generation is now entering, or close to entering, secondary school and, at some point, will obviously be looking to enter the job market, enter the university market, and that does have an interesting consideration for property demand in the UK and the ability for that population to really find somewhere to live, to be able to rent. And I think that that’s a very slow-burning and very long-term consideration and as somebody who has a 10-year old, I find that quite interesting as I see that generation going through. So, there’s a lot to be said about those particular opportunities.
And demographics generally all over the world are challenging, whether that’s birth shortages or birth spikes, and all of those have really interesting impacts to property markets.
And I guess the last one, which you’ve already mentioned, and as we all know, we’re in a hugely interesting, incredible and unprecedented geopolitical year. You know, over 75 presidential and general elections globally. We’re coming to the end of those now and book-ended by the US election, of course. All of that will have some sort of contributory factor to global property prices, and including in the UK, both domestically and for those internationally looking at London.
And why is that? Well, a number of reasons. Just because there has been an election doesn’t mean we really know what those changes mean, so they will take a few years, without a doubt, to come into fruition. We are seeing demand from a number of pockets of places around the world, where perhaps the outlook locally makes London, which was always very attractive, but even more attractive right now, and certainly we’re seeing that from the US and the Middle East, and London remains a safe place to work, a safe place to live and politically very stable. So, we continue to see those key drivers and I think as those 75 elections all play out, and what the reality of those mean, I think it will be a constant dynamic for the UK, and especially the London property market, over the coming years.
JL: Excellent, very comprehensive. Thank you so much, Stephen, and don’t go too far. We’re going to need you back very soon on our podcast, whether it’s for a further update on UK house prices or on the Budget. So, thank you for your availability.
All that is left is for me to tell you a couple of things to look for this week. It’s a relatively more quiet week, in terms of macroeconomic data. Probably the most important release will be the purchasing managers’ surveys, the PMIs. Once again, the economic momentum has likely diverged between manufacturing and services in October. In the eurozone, in particular, manufacturing activity should still be in contraction.
Hopefully in the UK, we continue to see some expansion, but probably moderating. And, of course, most of the focus this week will be on earnings and many companies on both sides of the Atlantic will be reporting quarterly results. Some key highlights, Tesla, L’Oreal and, of course, Barclays.
With that, I wish you, as always, the very best in the trading week ahead.
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