‘Storm clouds’ over UK housing market as builder warns interest rate rises will hurt

Kamis, 08 Juni 2023

‘Storm clouds’ over UK housing market as builder warns interest rate rises will hurt – business live - The Guardian

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Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Storm clouds are gathering over the UK property market, according to the country’s surveyors.

The Royal Institution of Chartered Surveyors (RICS) is warning this morning that expectations of further interest rate rises from the Bank of England may put renewed downward pressure on the market in the months ahead.

RICS’s monthly healthcheck on the property sector has found some improvement in market conditions during May, with the first rise in new instructions since early 2022. House prices continue to fall in much of England, although Scotland and Northern Ireland have witnessed an uplift.

RICS Senior Economist, Tarrant Parsons, says there was a modest recovery in the sales market activity during May, with generally less negativity compared to the end of 2022.

But he warns that expectations of further interest rate hikes will hit demand and affordability.

“However, it seems storm clouds are gathered, with the UK’s stubbornly high inflation likely undermining the recent improvement in activity by prompting the Bank of England to take further action through interest rate rises, leading to higher mortgage rates and ultimately reducing affordability and buyer demand.

The banking sector appears to expect this with many banks and building societies already introducing products with higher interest rates.

Yesterday morning, Halifax reported that house prices experienced their first annual fall in more than a decade last month.

The Bank of England has already raised interest rates 12 times in a row, and the City currently expects another rise this month, from 4.5% to 4.75%. They could hit 5.5% by the end of the year, the money markets indicate.

Interest rate rises are also impacting the rental sector, encouraging landlords to leave the sector and sell up property, Parsons adds.

Also coming up today

The UK’s financial regulator has unveiled a major shake-up of the rules around marketing of cryptoassets.

The crackdown from the Financial Conduct Authority will include banning the so-called “refer a friend” bonuses that are popular in the industry. Promoters must also ensure adverts are clear, fair and not misleading, and ensure people have the appropriate knowledge and experience to invest in crypto.

Sheldon Mills, executive director at Consumers and Competition, said:

“It is up to people to decide whether they buy crypto. But research shows many regret making a hasty decision. Our rules give people the time and the right risk warnings to make an informed choice.

“Consumers should still be aware that crypto remains largely unregulated and high risk. Those who invest should be prepared to lose all their money.

“The crypto industry needs to prepare now for this significant change. We are working on additional guidance to help them meet our expectations.”

The agenda

9.30am BST: Latest UK economic activity and business insight data
10am BST: Eurozone growth figures for Q1 2023 (third estimate)
1.30pm BST: US weekly jobless data

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It would be a mistake for the government to heed calls from housebuilders to restart the Help To Buy scheme, argues Graham Cox, founder of the Bristol-based broker, SelfEmployedMortgageHub.com.

Help To Buy, introduced in 2013, provided government-backed loans to purchase a new-build home, and shut at the end of March.

Homebuilders benefitted from the pick-up in sales, so it’s not surprising that Crest Nicholson is today urging ministers to provide some form of assistance.

Cox says:

“Desperation emanates from every word of Crest Nicholson’s trading statement, as they implore the government to do something, anything, to stem the tide. No doubt they would love Help to Buy to make a comeback, as they’ve made huge profits off the back of it over the past decade.

It would, however, be a huge mistake, which is not to say the government won’t make it, particularly with the Tories languishing in the polls. What really helps people buy is cheaper house prices. Help to Buy only increases them.”

Former chancellor George Osborne has claimed that Help to Buy “helped hundreds of thousands of families buy their own home and supported thousands of construction jobs”.

Housing experts, though, warn that it inflated the housing market and swelled housebuilders’ profits.

There are jitters in the bond markets this week, as traders recognise that global central banks are far from finished fighting inflation.

Bond prices have fallen, driving up the yield (or interest rate) on government borrowing, which is a sign that investors expect interest rates to keep rising.

Already this week, two central banks – in Australia and Canada – have surprised the markets by raising borrowing costs, when they were expected to hold them steady.

This morning, UK short-term borrowing costs have hit the highest level since the mini-budget turmoil last autumn. The yield (or interest rate) on UK two-year gilt yields has hit its highest level since late last September, at 4.6%.

The yield on two-year UK government bonds

Those gilts are used by banks and building societies when pricing mortgages, so rising yields will feed through to higher borrowing costs.

Shares in housebuilder Crest Nicholson have dropped almost 4% in early trading, after it flagged slowdown worries.

Investors are reacting to its 60% drop in profits and warned that rising interest rates would cool the markets (see early post).

Britain’s labour market cooled last month, with the starting salaries paid to permanent staff rising at the weakest pace in over two years.

The latest Jobs Survey from KPMG and REC has found that economic uncertainty continued to dampen hiring activity in May.

Hiring in hospitality, healthcare and engineering remained strong, but demand is weakening in construction, IT and retail.

Permanent staff appointments fell for the eighth month in a row, as companies cut back on hiring, with vacancies expanding at the second-softest rate since early 2021.

Caution around the outlook and delayed decision-making led to a further marked fall in permanent staff appointments, while temp billings rose only slightly, recruitment consultants reported.

Neil Carberry, REC chief executive, said:

“Despite the overall temporary work market continuing to grow – and permanent hiring declining from the sugar rush of 2022 – the story can vary widely across different businesses as their economic outlook remains unclear.”

Wizz Air aircraft at Ferenc Liszt International Airport in Budapest.

In the travel sector, budget airline Wizz Air is hopeful of returning to profit this year.

Wizz almost doubled its passenger numbers in the last financial year, to 31 March, carrying 51m (a company record), up from 27m the previous year when pandemic disruption hit demand.

That helped narow its losses by 16% in the last financial year, to €535m.

And it hopes to make a net profit this financial year of €350m-€450m, helped by increased demand. However, “adverse exogenous events” such as an incremental impact from the war in Ukraine or delays to deliveries of new planes could disrupt that.

One of the UK’s building firms is warning of a further slowdown in the housing market this morning too, and urging more action from the government.

Crest Nicholson has reported a fall in revenues in the six months to 30 April to £282.7m, down from £364m a year before. Adjusted pre-tax profits more than halved to £20.9m, from £52.5m.

Peter Truscott, chief executive, says the period began amid “the worst of the economic uncertainty arising from the September 2022 mini-budget”.

Rapidly falling consumer confidence and rising interest rates immediately led to softer demand in the housing market, Truscott explains. And although confidence has returned, Crest Nicholson fears that rising interest rates will cool demand further.

Truscott says:

The economic case for buying a home therefore remains compelling, but for many first time buyers the higher cost of borrowing and the cessation of Help to Buy are prohibitive to realising this ambition.

If interest rates continue to rise, and remain elevated for a sustained period of time, this will undoubtedly exacerbate this issue even further and start to impact demand and confidence again. We continue to call on Government to recognise this challenge and provide further support to these potential homeowners.

Mortgage rates in the UK have been rising in recent weeks, and some lenders have also pulled deals from the market.

It emerged last month that Rishi Sunak was drawing up plans to boost support for first-time home buyers, as part of the next general election campaign.

Officials in Downing Street and the Treasury are looking at proposals to help thousands of renters who have been unable to get on the housing ladder in the face of high prices and rising interest rates, The Times reported at the start of May.