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Bank vote could see interest rates hit their highest level since 2009

THE Bank of England will decide whether to hike interest rates to their highest level for more than nine years next week as economists predict a “close call” decision.

In what would mark another milestone for the economy in its recovery since the financial crisis, members of nine-strong Monetary Policy Committee (MPC) are expected to increase rates from 0.5 per cent to 0.75 per cent on Thursday.

The move would see rates hit their highest level since March 2009, when they were slashed from 1 per cent to 0.5 per cent as the financial meltdown and recession wrought havoc.

Investec economist George Brown said he is “fairly confident” the Bank will move to raise rates and is pencilling in an 8-1 vote in favour, with Sir Jon Cunliffe the only dissenter.

He believes the economy has performed in line with the Bank’s last forecasts in May, when it backed off from a widely anticipated hike and said it wanted to wait and see how the economy recovered after a weather-hit start to the year.

The bank also edged a step closer to pressing the button in June when its chief economist Andy Haldane joined two fellow policymakers in calling for a rise.

Howard Young at the EY Item Club believes the vote may be less definitive, given that inflation figures recently came in lower than expected – unchanged at 2.4 per cent in June, while wage growth has also been weak.

He said: “It has recently become a closer call, but we believe that the odds still favour the Bank of England lifting interest rate from 0.50 per cent to 0.75 per cent on Thursday after the August MPC meeting – most likely following a split vote.”

He added: “With interest rates down at 0.50 per cent, the Bank of England would clearly likely to gradually normalise monetary policy given that it is essentially an emergency low rate.

“Furthermore, inflation remains above target and the labour market looks relatively tight with the MPC considering that there is little slack left in the economy.”

The decision to raise rates would come as a blow to some borrowers on variable rate mortgages, but would offer relief to savers who have seen paltry returns on deposits since rates have languished at 0.5 per cent or below since 2009.

It is thought the bank’s latest set of forecasts in the accompanying inflation report will reinforce the case for a rise, with many economists expecting growth to have recovered to 0.4 per cent in the second quarter after slowing to 0.2 per cent in the previous three months.

The bank had already predicted in May that this would be the case and its latest set of forecasts are set to confirm its outlook for the year ahead.

But the bank is likely to increase its inflation forecasts, with a weaker pound and higher oil and energy prices pushing up the outlook and further justifying the need for a rise.

A rate rise in August would be the second hike in the past year, after the Bank voted for an increase from 0.25 per cent to 0.5 per cent in November – the first such move for more than 10 years and reversing the cut made in the aftermath of the Brexit vote.

Mr Brown believes this will be the only increase in 2018, however, predicting a quarter point rise every six months until they reach 1.5 per cent in 2020.

“We think the bank wants to raise rates in a gradual way and that would be consistent with the next one in February,” he said.

Source: Irish News

buy-to-let market
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London buy-to-let market bounces back

London’s buy-to-let market saw the most purchase applications across the UK in the second quarter of 2018 for the first time in a year, Commercial Trust data shows.

In all 15.34% of applications were in London, overtaking the South East (13.76%). The North West recorded stronger activity than previously with an 11.11% share.

Andrew Turner, chief executive at Commercial Trust Limited, said: “We are delighted to have seen an overall increase in the volume of buy-to-let mortgage purchase applications amongst our client base in the first two quarters of 2018.

“There is a growing role for specialist brokers in an increasingly complex buy to let market. The bewildering choice of products continues to grow, and the 2017 rule changes around buy to let add significantly to the intricacy of matching borrower to mortgage.”

London also saw an 8.97% increase in buy-to-let completions in the second quarter from the one before.

This is the first quarter in which London has had the biggest share in the broker’s completions (15.79%), since Q3 of 2017.

Turner added: “These figures make for encouraging reading. The London market has slowed of late, I hope our findings may reflect a sign of recovery in investment in the city.

“Whilst property prices and stamp duty costs have undoubtedly quelled the investment ambitions of some landlords in the capital, there are those still willing to put their faith and money into London bricks and mortar.

“If you are a landlord looking to invest in the capital, or elsewhere, we would be very happy to discuss your aims and help to steer you on the path to rental property success.”

Source: Mortgage Introducer

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Here’s what a no deal Brexit would mean for the British economy

  • Capital Economics’ Vicky Redwood examined the potential economic impact of a no deal Brexit on the UK.
  • The UK should skirt around a recession in 2019, but growth would take a major hit, she said.
  • “Although the more extreme warnings about the short-term impact of a ‘no-deal’ Brexit on the economy are overdone, there is little doubt that it could deal a reasonable blow to GDP growth next year,” Redwood wrote to clients on Wednesday.

The prospect of a no deal Brexit reared its head again this week, as the government admitted it is stockpiling food and medicines in preparation for such an occurrence, and Trade Minister Liam Fox told Business Insider that Britain should “leave without a deal” if one has not been secured by the end of the Article 50 period.

Warnings abound about the possibility of shortages of goods, the grounding of flights, and chaos at borders if no deal does materialise, but what would happen to the UK economy as a whole?

Writing this week, Vicky Redwood, global economist at Capital Economics, argued that while “more extreme” warnings about the economic hit of no deal are being “overblown,” a significant impact negative impact could still be expected.

“Although the more extreme warnings about the short-term impact of a ‘no-deal’ Brexit on the economy are overdone, there is little doubt that it could deal a reasonable blow to GDP growth next year,” Redwood wrote to clients.

In the longer run, Redwood said, it is very difficult to predict what the economic impact would be, but there would be significant negatives in the short tem.

“Whether a no-deal scenario had a good, bad, or little impact on the economy in the long run would depend on many things, including how successful the UK was at striking new trade deals and whether there was an exodus of financial institutions from the UK. But the short-run effect would surely be bad,” she told clients.

Redwood did not go into specific detail in terms of forecasts, but said that a no deal Brexit could “plausibly knock a percentage point or so off growth next year.”

One of the reasons for that, Redwood argued, is that no deal would inevitably have a major negative impact on the price of the pound.

“On the plus side, this would cushion the impact on exporters,” she wrote. “But it would also push up inflation, renewing the squeeze on consumers’ real incomes seen after the pound fell following the EU referendum in June 2016.”

Real wages for UK workers dropped significantly in the 18 months after the referendum as inflation rose to 3% but wage growth remained around 2%. Britain is a consumer focused economy, so when regular workers are earning less, and therefore not spending on non-necessity items, the economy at large suffering.

Such an issue could be compounded, Redwood said, by the UK “imposing import tariffs on the EU, raising import prices.”

Furthermore, business leaders have largely argued for the softest Brexit possible, so no deal would likely represent a major dent to business confidence overall.

“Admittedly, the nosedive in sentiment and GDP growth that was widely expected after referendum never happened,” Redwood said. The chart below shows that expected nosedive.

“But that was partly because of hopes that the UK would reach an agreement to replicate the current free trade arrangements.”

Redwood is, however, much less pessimistic than some forecasters, saying that it is unlikely a no deal Brexit will “plunge the UK into recession.”

One reason for that, she said, is that Britain wouldn’t need to pay anything to Brussels on exiting.

“Remember that leaving without a deal would mean that the UK wouldn’t have to pay its (front-loaded) Brexit ‘divorce bill’ of £40bn odd, equivalent to around 2% of GDP. This money could be used to offset the adverse effects on the economy.”

Redwood also sees Britain falling back on WTO rules for trade as “not the end of the world.”

“As far as trade is concerned, reverting to World Trade Organisation (WTO) rules would not be the end of the world. While the UK would face the EU’s Common External Tariff on its exports to the EU, tariff rates are on average low at 4%,” she concluded.

Source: Business Insider UK

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Bank of England expected to hike interest rates next week

The Bank of England will decide whether to hike interest rates to their highest level for more than nine years next week as economists predict a “close call” decision.

In what would mark another milestone for the economy in its recovery since the financial crisis, members of the nine-strong Monetary Policy Committee (MPC) are expected to increase rates from 0.5 per cent to 0.75 per cent on Thursday.

The move would see rates hit their highest level since March 2009, when they were slashed from 1 per cent to 0.5 per cent as the financial meltdown and recession wrought havoc.

Investec economist George Brown said he was “fairly confident” the bank would move to raise rates and is pencilling in an 8-1 vote in favour, with Sir Jon Cunliffe the only dissenter.

He believes the economy has performed in line with the bank’s last forecasts in May when it backed off from a widely anticipated hike and said it wanted to wait and see how the economy recovered after a weather-hit start to the year.

The bank also edged a step closer to pressing the button in June when its chief economist Andy Haldane joined two fellow policymakers in calling for a rise.

Howard Young at the EY Item Club believes the vote may be less definitive, given that inflation figures recently came in lower than expected – unchanged at 2.4 per cent in June, while wage growth has also been weak.

He said: “It has recently become a closer call, but we believe that the odds still favour the Bank of England lifting interest rate from 0.50 per cent to 0.75 per cent on Thursday after the August MPC meeting, most likely following a split vote.” He added: “With interest rates down at 0.50 per cent, the Bank of England would clearly likely to gradually normalise monetary policy given that it is essentially an emergency low rate.

“Furthermore, inflation remains above target and the labour market looks relatively tight with the MPC considering that there is little slack left in the economy.”

The decision to raise rates would come as a blow to some borrowers on variable rate mortgages, but would offer relief to savers who have seen paltry returns on deposits since rates have languished at 0.5% or below since 2009.

It is thought the bank’s latest set of forecasts in the accompanying inflation report will reinforce the case for a rise. Many economists are expecting growth to have recovered to 0.4 per cent in the second quarter after slowing to 0.2 per cent in the previous three months.

The bank had already predicted in May this would be the case and its latest set of forecasts are set to confirm its outlook for the year ahead.

But the bank is likely to increase its inflation forecasts, with a weaker pound and higher oil and energy prices pushing up the outlook and further justifying the need for a rise. A rate rise in August would be the second hike in the past year after the bank voted for an increase from 0.25 per cent to 0.5 per cent in November – the first such move for more than ten years and reversing the cut made in the aftermath of the Brexit vote.

Mr Brown believes this will be the only increase in 2018, however, predicting a quarter point rise every six months until they reach 1.5 per cent in 2020.

“We think the bank wants to raise rates in a gradual way and that would be consistent with the next one in February,” he said.

Source: Scotsman

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Prime UK commercial property rents up 0.7% in Q2

UK prime commercial property rental values increased 0.7% in Q2 2018, according to CBRE’s latest Prime Rent and Yield Monitor. At the All Property level, prime yields were essentially flat, ticking up 1bp to 5.3%. Outperformance by the Industrial sector continues to boost results in both prime rents and yields.

Q2 2018 was the seventh consecutive quarter of Industrial outperformance, with prime rental values increasing 2.1% over the quarter, close to the 2.3% reported in Q1. Unlike previous quarters, the strongest rental growth was not in the London (2.8%), South East (2.0%), or Eastern (2.1%) markets. In Q2 2018, prime North West Industrials outpaced all other submarkets with rental values increasing 5.9%, the largest increase for the region since Q2 1990.

High Street Shop prime rents decreased -0.5% in Q2 2018, the biggest quarterly fall for the sector since Q3 2012. The biggest falls in prime rents were recorded in the South West (-2.5%) and Wales (-2.6%), though almost all regions reported falls. Prime Shopping Centres experienced a 1.0% increase in rents in Q2, while Retail Warehouse prime rents were flat.

Office prime rents increased 0.6% in Q2, up from 0.4% in Q1 2018. Central London Office prime rents decreased slightly, down -0.1% in Q2 thanks to a fall of -0.1% in the West End. For a second quarter, no markets outside Central London reported a decrease in prime rents. Rest of UK (excl. SE and Eastern) prime rents increased 1.7%, while South East and Eastern rents increased 1.1% and 0.9% respectively. Suburban London Offices also reported a 1.2% increase.

Prime yields were largely stable in Q2, moving up just 1bp to 5.3% over the quarter. Stability at the All Property level masked significant divergence at the sector level, betraying investors’ relative preference for Industrials, and lack of interest in Retail.

High Street Shops prime yields rose 16bps over the quarter to reach 5.2%. Prime Shopping Centre yields increased 15bps in Q2, while Retail Warehouses were stable.

Prime Office yields were relatively stable in Q2 falling -1bp. While Central London yields rose 1bp, Rest of UK (excl. SE and Eastern) yields ticked down -10bps in Q2, driven by movements in the North East (-31bps), Yorkshire & Humberside (-23bps) and Scotland (-18bps).

Industrial sector prime yields fell ‑11bps in Q2 2018. London reported the biggest fall in prime Industrial yields, moving in ‑25bps over the quarter. All UK Industrial prime yields have now fallen -85bps over the last 18 months.

Miles Gibson, Head of UK Research at CBRE, said: “All Property results continue to demonstrate the resilience of prime commercial property, although performance continues to be boosted by the Industrial sector. The current run of CVAs in the Retail sector is having a noticeable impact on prime rents and yields, as they have done on performance figures in our UK Monthly Index.”

Source: SHD Logistics

Bank of England
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Bank of England poised to push rates above crisis lows

The Bank of England looks set to pass a post-financial crisis milestone next week by finally raising interest rates above their emergency levels set more than nine years ago.

But with a potentially messy Brexit nearing, Governor Mark Carney may sound cautious about the pace of further moves away from the BoE’s still-powerful stimulus programme.

In March 2009, when the financial crisis was raging, the BoE slashed its benchmark rate to 0.5 percent to stave off the risk of a depression.

Bank Rate has sat there since, apart from a 15-month period after the shock referendum vote in 2016 for Britain to leave the European Union, when it was cut again to 0.25 percent – the lowest in the three-century history of the central bank.

Now, Carney and his colleagues are expected to nudge rates up to 0.75 percent on Aug. 2, going beyond last November’s increase back up to 0.5 percent.

However, taking rates above their crisis levels will not be a vote of confidence in the world’s fifth-biggest economy.

Britain has gone from having the strongest growth of the Group of Seven rich nations to being one of the slowest after the Brexit decision.

The terms of Britain’s future relationship with the EU are still unclear, eight months before Brexit, and Prime Minister Theresa May could yet be unseated by her own Conservative Party which is split on how close the country should remain to the bloc.

At the same time, consumers are still feeling a squeeze on their spending power. And inflation, while above the BoE’s 2 percent target at 2.4 percent, has been weaker than expected.

Nonetheless, the BoE says the economy cannot grow even at its current sluggish rate without causing too much inflation, given Britain’s chronically weak productivity growth.

A BoE decision to raise borrowing costs could also be backed up by a new estimate of what it considers the neutral interest rate for Britain’s economy, which neither stimulates nor suppresses demand and which is likely to be rising in the coming years as the effects of the financial crisis fade.

U-TURN AHEAD?

BoE officials have tried to soothe concerns about raising rates, something they promise will be gradual and limited.

“Voting for a 25 basis-point rate rise, a full decade after monetary policy was first placed on an emergency setting, is hardly either surprising or radical,” Chief Economist Andy Haldane said in late June.

But some analysts believe raising borrowing costs is an unnecessary risk that the central bank is taking because it failed to deliver on previous signals that a hike was coming.

John Wraith, a strategist at UBS, said domestic inflation pressure — chiefly from wage growth — was very benign while tighter monetary conditions risked triggering a squeeze on indebted consumers and cooling domestic demand.

“If and when that happens, the interest rate market may start to anticipate a reversion by the (BoE) to a neutral policy stance, especially if there are ongoing headwinds and downside risks to the outlook emanating from the UK’s protracted exit from the EU,” he said in a note to clients, adding that investors might even start to bet on a rate cut ahead.

Yet the chance of an increase on Thursday is rated at 80 percent by financial markets, and eight of the BoE’s nine monetary policymakers are likely to back a rise, analysts say.

Investors will be listening closely for whatever signals Carney gives about the outlook for further increases.

Markets are not pricing in an increase in borrowing costs to 1 percent for at least another year.

In the past, Carney has warned investors they are being too relaxed about the prospect of further hikes.

Victoria Clarke, an economist with Investec, said the BoE might want to send another reminder to the market to remain on guard, as long as Britain manages to secure a deal with the EU and avoid a damaging “cliff-edge” Brexit.

“We don’t know what politics will bring but I think Carney would want to push those expectations up a bit,” Clarke said.

Source: UK Reuters

London
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House prices pick up in London over Q2

London City house price growth has picked up over the last quarter as the capital’s housing market starts to stabilise, the latest Hometrack UK Cities House Price Index has found.

In the three months to June house prices rose by 1.8%, having fallen by 1% over the previous six months.

After two years of weak demand and falling sales there are signs that London’shousing market is beginning to steady, although the annual rate of growth remains low at +0.7%.

Richard Donnell, insight director at Hometrack, says: “After two years of falling sales volumes and rising discounts to achieve a sale there are some signs of life returning to the London housing market. Discounts are finally starting to narrow as sellers become more realistic over pricing.

“While prices in London have picked up over the last quarter, we expect the annual rate of growth to remain weak for the foreseeable future. The positive news is that greater realism on the past of sellers will support transactions, which have fallen by 20% since 2014.

“The UK market is operating at two-speeds at the moment, with growth in regional cities in the Midlands and North West far outstripping those in the South.

“However, affordability pressures in the South East in particular are having a slowing effect on house prices as borrowers are priced out of the market.”

The recent trend is supported by the fact that 61% of postcodes in London are currently registering month-on-month price rises according to Hometrack’s most granular indices.

This modest improvement in market conditions reflects greater realism on the part of sellers in the wake of a two-year re-pricing process. The discounts sellers must give buyers to achieve a sale has started to narrow across London, reversing a two year upward trend where the discount grew from 1% in Q2 2016 to 5% in Q1 2018. It has fallen back to 4.8%.

London is in a group of six cities where house prices are failing to keep pace with the rate of goods inflation (CPI) and where house prices are falling in real terms – Southampton (2.1%), Oxford (1.9%), Belfast (1.4%), London (0.7%), Cambridge (-0.2%) and Aberdeen (-2.8%).

House price growth was strongest in cities in the Midlands and North West of England. Manchester is registering the highest annual growth rate (7.4%), followed by Liverpool (7.2%), Birmingham (6.8%) and Leicester (6.5%).

The level of discounting from the asking price to achieve a sale was lowest in Manchester (2.2%) where market conditions have remained strong for the last two years. Discounts have fallen in Liverpool, where prices are rising off a low base, but remained above average at 4.8%.

Source: Mortgage Introducer

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House price freeze wouldn’t help first-time buyers

While property values continue to grow across the UK, averaging 2% a year, areas such as Edinburgh and Manchester are soaring ahead of the UK, while London is showing a modest decline. In Edinburgh, properties are being for sold up to 17% over the asking price. The difficulties first-time buyers face show little, if any, sign of abating.

The IPPR paper recommends disincentivising property investment by freezing house prices for five years to (in their view) stabilise the housing market, devalue an over-inflated pound and increase exports. This would result in property values falling 10% by 2023. According to the paper, this would make it easier for first-time buyers to afford a home.

The Bank of England’s monetary policy committee would be tasked with freezing house prices for five years, then maintaining an annual increase in property values that matched inflation – effectively a zero gain.

The IPPR paper goes on to suggest that this freeze could be achieved through fiscal measures by increasing the controls on access to mortgages. The IPPR paper admits that this, in turn, would make it harder for first-time buyers to borrow. Although this would negate the premise of the price freeze, they offer no solution to their self-inflicted fiscal oxymoron, bar passing it to someone else to advise on and solve. The paper appears to want to have its cake and eat it.

Freezing property prices at a single moment in time implies that the price paid today is the right one. Potentially placing recent purchasers in areas where prices have since declined moderately into negative equity with no possible respite for at least five years.

Is that a solution to aid first-time buyers and exports?

Source: Property Week

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UK mortgage approvals rise to highest since September

The British mortgage market showed some signs of stabilising in June as the number of mortgage approvals rose to its highest since September, according to data published today.

British banks approved lending for 40,541 house purchases during the month, above expectations of around 39,100, the latest seasonally adjusted figures from industry body UK Finance show.

The value of approved loans for house purchases rose to above £8bn for the first time since February.

However, the figures continue to show weakness in demand for borrowing, with the number of approvals still 2.1 per cent lower than June last year. Economists and industry figures have warned that the outlook for the housing market is clouded by political uncertainty as the UK leaves the EU, while an imminent interest rate rise will test Britons’ appetite for more expensive debt for only the second time in a decade.

Lenders have been sustained in part by a strong demand for remortgaging, as borrowers rush to lock in low rates before the Bank of England raises the cost of borrowing further. The Bank is widely expected to increase bank rate, at which it lends to banks, by 0.25 percentage points next week.

The 3.4 per cent year-on-year increase in remortgaging has made up for a 4.7 per cent reduction in house purchase lending in June compared to the same month last year. Mortgage approvals for remortgaging fell slightly in June compared to May, although at 29,354 remained the second strongest performance since September.

Across the entire mortgage market gross lending has risen 2.1 per cent year-on-year to £23.5bn, driven by specialist lenders. High street bank mortgage lending has fallen by 2.9 per cent during the same period.

Source: City A.M.

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Slump in London house-building weighs on UK housing starts

British builders have cut back sharply on the number of new homes they plan to start in London, taking the shine off industry data which otherwise remained near its strongest since the global financial crisis.

Builders reported plans to start work on 12 percent fewer homes in London in the three months to June than a year before, the National House-Building Council, an industry body that insures about 80 percent of new construction, said on Thursday.

Just 2,917 homes were slated for construction, the smallest number for this time of year since the depths of the financial crisis in 2009 and less than half the number started a year before 2016’s Brexit vote.

London recorded the most new housing starts of any British region between 2010 and 2015. But since then its housing market has weakened due to concern that Brexit will hurt its financial sector and its appeal to foreign investors, as well as higher purchase taxes on homes costing over 1 million pounds.

Housing starts increased in most other parts of the United Kingdom during the second quarter. But the decline in London meant the overall total dropped 3 percent on the year to 38,978, its lowest for the time of year since 2014.

“Demand for new homes across the UK remains strong,” NHBC Chief Executive Steve Wood said. “We have seen some promising numbers coming through, in particular during May and June.”

House prices in London dropped by 1.9 percent on the year in the second quarter of 2018, the only region of the United Kingdom to show a fall, according to figures from mortgage lending Nationwide Building Society.

Last month London-focused housebuilder Berkeley (BKGH.L) warned pre-tax profits would fall by 30 percent this year, blaming a lack of large development sites as well as higher property purchase taxes and the effect of Brexit.

Housebuilders cut back on buying large sites in 2013 and 2014 when prices started to rise after the financial crisis, which now was reducing the flow of new homes, Berkeley said.

LABOUR SHORTAGES

Shortages of European construction workers are also pushing up construction costs in the British capital, according to a separate report from the Royal Institution of Chartered Surveyors, also released on Thursday.

“Brexit and the uncertainty of labour from EU countries has affected labour resources on construction sites. This, in turn, has made tender sums increase without increasing contractor profits,” RICS member Christopher Mills said.

New housing starts in the United Kingdom overall rebounded by 6 percent from the first three months of 2018, when unusually snowy weather delayed work.

NHBC’s measure of quarterly housing starts slumped below 17,000 during the depths of the financial crisis, before recovering to peak at 42,423 in early 2017, helped in part by government subsidies for buyers of newly built homes.

Boosting house-building has been a stated priority for Britain’s government as it tries to address concerns among many voters about a lack of affordable housing in many areas.

But many in the industry say little has been done to speed up the local government planning process that makes it slow to get approval for many projects.

RICS said difficulties financing projects were also causing growth to slow.

“Anecdotal evidence suggested that the housing market slowdown, coupled with ongoing ambiguity with the Brexit negotiations, is weighing on investment decisions,” RICS said.

Source: UK Reuters