LONDON (Reuters) – Banks scrambled to push back their forecasts for the next Bank of England interest rate raise after data on Friday showed a sharp and unexpected slowdown in Britain’s economic growth.
The new forecasts anticipate the next BoE hike to take place in August this year or as late as 2019.
Before Friday’s GDP data most economists had expected the central bank to tighten monetary policy in May.
The change in banks’ forecasts signals a much weaker outlook for the pound, which has been among the best performing major currencies in 2018.
Last week expectations of higher rates lifted sterling to its highest since the Brexit referendum in June 2016.
The likelihood that the BoE will not hike next month also means bond prices could rally further and presents a more volatile backdrop for the UK stock market.
UBS scrapped its estimate of a single rate hike in 2018 after the weaker-than-expected growth figures while Nomura, which has long been hawkish on UK interest rates, now sees a first hike in August.
Bank of America Merrill Lynch and Natwest Markets strategists pushed back their May rate hike calls to November.
“We view the (economic) slowdown as more serious, and see no prospect of hikes in 2018,” said UBS, the world’s largest wealth manager, in a note.
John Wraith, a UBS economist, said inflation could fall back to the central bank’s target of two percent later this year and that concerns about talks between Britain and the European Union over the terms of their divorce could resurface.
Market expectations of a rate hike in May tumbled to less than 20 percent from around 50 percent, after GDP data showed Britain’s economy slowed to 0.1 percent growth between January and March, the weakest quarter since 2012.
Earlier this month the market was pricing in a 90 percent chance of a rate rise.
The market is now also forecasting no more than one 25 basis point rate hike over the remainder of 2018, from a near-certain two rate rises expected a fortnight ago.
Sterling GBP=D3 tanked more than one percent to $1.3748 and government bond prices surged in the aftermath of the data.
Reporting by Tom Finn and Saikat Chatterjee, Editing by Tommy Wilkes and William Maclean
On the 29th of March 2019, the UK will leave the EU. There are several key areas of concern across every sector of the country, but what does Brexit mean for UK property, and how is the market confronting the challenges?
In less than 12 months, Britain is scheduled to leave the European Union, following a hard-fought referendum back in June 2016. The negotiations are well underway, with progress being made on key issues, such as the duration and specifics of the transition period, citizens’ rights and future trade deals.
Despite the pervading uncertainty and cooling activity, investor confidence and growth projections for the UK’s property market remain strong, supported by dwindling supply and climbing demand.
2018 is the year when decisions on Brexit must be made, and property investors prepare to adjust to a new status-quo. But is the UK’s post-Brexit future still unclear, and what does it hold for those investing in UK property?
The country has been on something akin to a rollercoaster since Prime Minister Theresa May invoked Article 50 last March, serving the official notification letter to the European Council that formally began the withdrawal process.
Following this, there have been various summits, a gamble of a general election, and the agreement of a vital transition period – which will begin after the UK’s official departure in March 2019 – all aimed at solidifying the UK’s new status in Europe.
While uncertainty is set to dissipate in the final year of negotiations before the UK exits the EU, the property market, like many other industries, has held strong since the referendum in June 2016 – defying expectations.
Despite house prices and rental growth slowing in recent months, the significant falls in property values projected in the wake of the referendum have failed to materialise.
According to data from Your Move and LSL/Acadata, annual house price growth in February 2018 remains positive at a modest 0.6%, while data from the Office for National Statistics (ONS) found that rents increased by 1.1% annually over the same period.
But if Brexit is not behind the deceleration in growth, what is?
Fundamentally, house price and rent growth in the UK is governed by the imbalance between the supply and demand for properties, with this current slowdown forming a natural part of the property cycle.
As housebuilding construction activity remains subdued, owing to high materials costs and a chronic labour shortage, the supply of homes in the UK continues to fall far short of demand, pushing prices up in a competitive, high demand market.
Yet, this growth has started to cool as property becomes increasingly unaffordable for many prospective buyers. With the cost of purchasing a home too high, many households are turning from the housing market and towards the more reasonable rates available in the private rented sector.
As a result, home sellers are having to be more competitive with their prices in order to attract buyers, despite estate agents registering fewer homes for sale in February, which has caused a modest drag on asking prices.
London commuter belt towns fall down the rankings as Northampton, Leicester and Birmingham surge
Three of the top five locations for buy-to-let property investments are in the Midlands, according to new research.
Northampton, Birmingham and Leicester were all cited as top postcodes for buy-to-let, with strong rental growth of 2.38%, 3.91% and 4.35% respectively, according to independent mortgage lender LendInvest.
Whilst the Midlands regions have been steadily rising up the rankings, the report highlights the South West region as an up-and-coming market, as strong rental growth and healthy market activity has boosted the profile of cities like Bristol, Swindow, Truro and Gloucester.
Conversely, London and the South East continue to underperform, as declining rents deters further investment in these regional markets.
Historically strong performing commuter towns like Dartford, Romford and St Albans have recent begun to slide down the LendInvest buy-to-let rankings, in some cases by as many as 58 places.
However, the report notes that demand for housing will continue to support future growth: “Political changes are increasingly underpinning this uncertainty in the market, however the need for housing around the UK prevails.
“As such, we can expect the rental market to grow, with investors prioritising yields and rental price growth as valuable metrics to consider when purchasing a property.”
Economic growth slowed again in February as the construction and manufacturing industries both stalled, a pair of oil refineries closed for maintenance, and the export boost from the weak pound began to fade.
The Bank of England had already cut its first-quarter growth forecasts from 0.4pc to 0.3pc because the icy Beast from the East made families stay at home instead of hitting the shops. But now economists fear even this estimate is too high.
The new figures “look consistent with GDP growth slowing to 0.2pc in the first quarter – below the Monetary Policy Committee’s 0.3pc forecast – from 0.4pc in the fourth quarter, casting doubt over whether a May rate hike is as likely as markets currently expect”, said Samuel Tombs at Pantheon Macroeconomics.
“We estimate that economic growth nudged lower to 0.2pc in the first quarter of 2018,” he said.
“The main reason for the weakness was severe weather in March, which is likely to have disrupted activity in all major sectors of the economy.”
Manufacturing output fell by 0.2pc in February, the Office for National Statistics said, and January’s 0.1pc expansion was also revised down to zero.
Falling output of electrical goods, machinery, textiles and plastics hit the figures.
Growth in industrial production overall – which includes manufacturing as well as industries such as mining and quarrying, and utilities – slowed to 0.1pc for the month.
A major cause was that two of the UK’s six refineries were closed for refurbishment. However, growth was supported by February’s unusually cold weather, which boosted domestic energy consumption.
At the same time construction output tumbled by 1.6pc in the month, defying expectations of a 0.9pc increase. This drop may not be entirely weather related. The ONS said maintenance work led the decline, even as residential building and infrastructure construction increased.
The trade deficit increased in the three months to February, rising by £0.4bn to £6.4bn, as a dip in imports was more than offset by a larger fall in exports – which the ONS said coincided with a strengthening of the pound.
However, the overall slowdown may only be a temporary wobble, rather than a longer-term slowdown in the economy.
“While a continuation of such news may generate some nervousness in markets about whether the Bank of England will deliver another rate hike next month, it is worth pointing out that there is another full round of economic news before the Bank announces its decision,” said George Buckley at Nomura.
“We continue to expect a 25-basis point move on May 10 on the assumption of better economic news to come.”
Chief economist Lee Hopley at manufacturing industry group EEF said: “The data looks more like a temporary wobble than a turn for the worse. Whilst other indicators may have softened since the start of the year, ongoing growth in the global economy should continue to spur growth across manufacturing in the coming quarters.”
UK house prices:Cambridge and Orkney see the biggest average price growth across the UK
New figures reveal the districts where house price growth outperformed the rest of the UK last year.
Property prices in Cambridge have risen by £63,000 in a year, according to the first detailed report on how much homes sold for in 2017.
Annual house price growth of 15 per cent takes the average price of a home in the university town and surrounding areas to £462,000.
Meanwhile, with prices across the UK rising by five per cent to average £227,000, the pace of growth in Cambridge is three times higher than the national average, according to the Office for National Statistics (ONS) report.
Last year, the government committed to a £7 billion investment programme in the city which is set to bring new roads, rail links and homes between Cambridge and Oxford.
“There is lots of talk about the Oxford-Cambridge corridor becoming England’s own Silicon Valley. Faster rail links for London workers is music to many home owner’s ears as the exodus from London continues,” says Michael Houlden, head of national estate agency at Strutt & Parker in Cambridge.
He reports that the proportion of buyers from London in the area rose by 60 per cent last year.
£475,000: this three-bedroom detached house is between Cambridge North and Cambridge stations with easy access to the A14
THE UK’S TOP 10 FASTEST RISING LOCAL AUTHORITIES IN TERMS OF HOUSE PRICE GROWTH:
Av. house price Dec 2017
Av. house price Dec 2016
Oadby and Wigston
Other areas with double-digit growth were Eden, just outside of the Lake District National Park, where an average house now costs £206,000; Kettering in Northamptonshire with average prices of £203,000; and the Cotswolds in south-central England.
An average of £48,000 was added to Cotswolds residences over the course of 12 months, taking the average price to £394,000 in December last year.
For this price, buyers seeking their own slice of Cotswolds charm can stretch their budget to a three-bedroom house with exposed beams and an Inglenook fireplace.
£400,000: this Grade II-listed, three-bedroom house is in the historic hamlet of Churchend.
“The Cotswolds remained a firm hotspot last year as it continued to attract strong levels of demand from buyers looking for a change of pace and lifestyle,” says William Leschallas, director of Jackson-Stops’ Burford branch.
Widely regarded for its beautiful countryside and picturesque villages, the area is proving popular with young professionals commuting to Cheltenham, Bristol and Bath, Birmingham and Oxford, as well as families and downsizers.
“We expect demand to continue over the coming years, but whether or not supply can keep pace is yet to be seen. There are a number of larger property schemes in the planning system on the edge of major Cotswold towns, which may appeal more to local buyers who wish to remain in the area as their needs change,” says Mark Johnson, residential development partner at Knight Frank.
Homeowners in TheOrkney Islands, off the north-east coast of Scotland, saw the biggest growth in percentage terms, with average prices rising by £23,000 (18.2 per cent) to reach £147,000.
For this, home owners can buy a dreamy two-bedroom house with sea and farmland views.
£155,000: a two-bedroom house in Orkney
“The romanticism of a secluded island life, coupled with an affordable price tag, has no doubt made the islands impervious to the negative market influences of the mainland. Although it is also likely that the Orkney Islands’ explosive growth is no doubt a tad skewed to a smaller sample size than most other areas of the UK,” says founder of Emoov Russell Quirk.
There are also generous grants available to businesses setting up in the area, which will be attractive to qualifying entrepreneurs.
Scotland’s West Dunbartonshire also made it in to the top five performing areas in terms of house price growth. With an average house price of just £109,000, it is nearly £20,000 cheaper than nearby Glasgow and nearly £70,000 cheaper than Stirling, boosting its appeal.
Newport was the standout area in Wales for price growth, with homes selling for an average of £168,000. However, growth of 9.6 per cent puts the region outside of the UK’s top 20 performing areas.
£169,950: a semi-detached three-bedroom home for sale in Newport
“Over the last few years, Scotland and Wales have seen property prices fall due to influences other than the wider uncertainty surrounding our departure from the EU.
“Both countries are home to pockets that have seen a drastic decline in the local property market, as the result of diminishing industries which have previously been pivotal to the local populace and economy,” says Quirk.
“However, with a much lower cost of getting on the ladder than the majority of regions in England, both have benefited from a greater degree of buyer and seller confidence, which has returned at a much quicker rate than other more inflated markets.”
London experiences lowest annual rental growth in over 7 years….
Official figures suggest the rental market remains subdued at the start of the year, whilst regional differences in performance persist.
In the 12 months to February 2018 rents in England increased by 1.1%, which remains unchanged on January, data from the Office for National Statistics (ONS) revealed.
This rises to 1.6% if London is excluded, where rents increased slightly by 0.1%; the lowest annual growth in the capital since September 2010.
The strongest rental growth was recorded in the East Midlands (2.5%), followed by the East of England and South West (2.1%), and the West Midlands and South East (1.7%), with above-average increases also reported in Wales (1.4%).
Kate Davies, executive director at The Intermediary Mortgage Lenders Association, believes the ONS figures demonstrate the burdens buy-to-let landlords are having to face, saying:
“Whilst [the data] may be giving tenants some temporary respite from higher rents, the flip-side is that landlords will be facing downward pressure on their cash-flows and profitability. This comes at a time when successive policy changes in the buy-to-let sector have proved detrimental.
“We therefore ask the Government to recognise the benefits that a strong private rented sector brings for the UK, and the importance of maintaining a good supply of rental properties for the periods when home ownership is not suitable or achievable for households.”
Latest index reveals previously struggling cities reporting highest house price inflation
Since 2009, the cities which reported the weakest house price growth are bouncing back, recording the fastest rate of price inflation.
According to the latest UK Cities house price index from Hometrack, city house price inflation increased to 6.3% in November 2017, compared to 4.9% in the previous year.
Cities in Scotland are showing the strongest price growth, with Glasgow (7.9%) and Edinburgh (7.6%) taking the top spot. Also above the 7% mark are Leicester (7.5%) and Birmingham (7.3%).
For 2018, Hometrack predicts city house prices will increase by 5%, spearheaded by regional cities as London continues to struggle.
“A year ago, we predicted that UK city house price growth would be 4%,” the report notes, “as a continued recovery in regional city house prices would offset very low nominal growth in London.
“We expect 2018 to follow a similar pattern.”
London continues to weigh down on property prices, with LSL Property Services/Acadata’s house price index reporting annual house price growth in the UK was 0.9%. Excluding the capital and the South East this figure rises to 3.3%.
Mr Carney’s latest letter will be published in February, when the Bank of England will also release its quarterly Inflation Report.
Analysis, Andy Verity, economics correspondent
It may be the highest rate of inflation for nearly six years. But that tells you not so much how high it has got but how low it has been for so long.
In the past 10 years, inflation’s peak has been 5.2% (in 2011). Tell anyone over the age of 50 that inflation at 3.1% is out of control and you’re likely to get a scoff, followed by memories of the 70s and 80s.
What they may forget, though, is that for most of that time wages were also rising – and faster than prices. The tendency of wages to respond to higher prices and outpace them seemed to follow an iron logic back then.
Bigger price rises led to bigger pay rises, forcing many employers to charge higher prices to cover higher labour costs: the so-called “wage-price spiral”.
But those rules don’t seem to apply these days. The breakdown of that logic is why we have a squeeze on living standards. It is also why the Bank of England isn’t that worried about above-target inflation getting higher or even staying above target. In the City, a second rise in interest rates isn’t expected until August next year.
Lucy O’Carroll, chief economist at Aberdeen Standard Investments, said: “It’s quite possible that inflation is now close to its peak. But some of the latest surveys suggest that service sector costs and prices are rising. Given how dominant services are in the economy, this could feed through to inflation overall.
“That means that further interest rate rises are definitely not off the table.”
The ONS said that although airfares fell in November – down 10.4% – the decline was not as steep as last year when they tumbled 13.4%.
Data also shows that food inflation has picked up, especially prices for fish, oil and fats, such as butter and chocolate.
Figures from market researcher Kantar Worldpanel released on Tuesday indicated that food inflation hit 3.6% in the three months to 3 December, the highest rate since 2013.
It also noted that prices for butter and fish had grown as well an increase in the cost of fresh pork. Kantar said only a few items were cheaper during the period, such as fresh chicken and crisps.
Richard Lim, chief executive at Retail Economics, said that the rise in inflation had come “at precisely the wrong time for retailers”.
“In the run-up to Christmas, the cost of living, now rising at the fastest rate in five years, remains uncomfortably high for households.”
He said that food inflation “is one of the most transparent indicators of living costs and often the catalyst to cut back on spending elsewhere”.
However, he expects the inflation rate to now fall and could reach 2.5% by Easter.
The ONS will announce employment data for the August to October period on Wednesday, which will include figures for wage growth.
Ben Brettell, senior economist at Hargreaves Lansdown, forecasts that average weekly wages have risen by 2.5% during the period.
He said: “With wage growth picking up we should see an end to falling real pay in due course.
“That’ll be of small comfort, however, to households facing a significant increase in the cost of Christmas this year.”
In his budget speech this week, the Chancellor pledged 2 billion for the Home Building Fund to be targeted specifically at small and medium sized builders (SME) – allowing them to play a greater role in tackling the UK’s critical housing shortage.
Welcoming the announcement, Chief executive Brian Berry from the Federation of Master Builders (FMB) said that the government’s new goal of building 300,000 homes pa by mid-2020s, together with the 50 billion pledged in the budget to meet this target, will boost the sector.
Furthermore, a 700 million fund has also been promised to increase opportunities for small scale developments, by requiring councils to deliver more homes from smaller sites, which are faster to build.
Further commenting on the proposals, Mr Berry said that with Brexit on the horizon, one of the major challenges to building more will be a shortage of skills, as European workers make up a significant proportion of the sector’s workforce.
Ensuring that the UK’s building industry continues to have access to a skilled labour pool remains therefore a concern for many in the sector.
Liz Jenkins, partner at international services firm Clyde & Co, said:
‘Meeting the Chancellor’s ambitious targets will require an available and skilled construction workforce.’
‘In the long term we need to be attracting the next generation of talent into the sector but we have an immediate priority to create the skills we need to deliver new homes today,’ she added.
UK annual inflation in September up 0.6% compared with August, while London prices decline…
The ‘north-south divide’ seems to be diminishing, as London’s house price growth continues to lag behind the rest of the country.
The north west of England continues to dominate, with a 7.3% rise year-on-year according to the September house price index by the Office for National Statistics (ONS).
By comparison, the capital saw growth drop by 0.2% since August to just 2.5% year-on-year.
As a whole, the UK experienced an annual price increase of 5.4%, up from 4.8% in August.
This is a much faster rate than what has been reported in other recent house price indices; 2.5% according to Nationwide, and just 1.4% announced by Rightmove.
Buy-to-let investors are turning away from the capital and Jonathan Hopper, manging director of Garrington Property Finders, believes economic growth in the north and higher yields are a possible cause.
“In the 12 months to September, prices in the capital rose at barely a third of the pace of those in the fastest-growing region.
“This shift is being driven by a steady flight of equity from London – and other previously overheated regions – to areas with greater affordability.”