OPINION: A fall in inflation bodes well for property, but we’re not out of the woods yet!

The FT reports a surge in property stocks as inflation falls, and bricks and mortar property values could soon follow stocks?

The latest Office for National Statistics (ONS) measure of inflation and prices, which includes consumer price inflation, producer price inflation and the House Price Index, rose by 7.9% in the 12 months to June 2023, that’s encouragingly down from 8.7% in May. It indicates a clear trend.

The indication is that CPI may have peaked and is on the way down, certainly encouraging news for mortgage borrowers. What’s more the governor of the Bank of England Andrew Bailey had said at a recent Mansion House speech recently that inflation will fall “markedly” over the rest of the year.

[Source: ONS]

The rate of price increases, thinks Andrew Bailey, will come down due to lower energy costs, which should result in falling food bills for shoppers.

BoE forecasts

The Bank has been criticised for its previous inaccurate inflation forecasts and for not taking action to bring down the rate of rising costs sooner, so the jury is still out on these predictions.

Under recent rigorous questioning from MP members of Treasury Committee, Mr Bailey said in May that there’s “a lot to learn” about operating monetary policy in a world of big shocks, such as the war in Ukraine and the COVID-19 pandemic.

The whole thing could easily go into reverse at any moment with the unpredictability of the war in Ukraine, economic and military threats from China, and for example Russia’s recent failure to sign another grain deal, which could have knock on effects for food prices yet again.

Core inflation more important

Perhaps of more interest to the City, and the main reason for the surge in stock prices, is the underlying inflation trend. The annual core inflation rate in the United Kingdom decreased to 6.9% in June 2023 from May’s 31-year high of 7.1%, compared to earlier forecasts of 7.1%

The core CPIH (includes owner occupiers’ housing costs) annual inflation rate was 6.4% in June 2023. This is down a modest amount from 6.5% in May 2023, which was the highest rate since November 1991, when it also stood at 6.5%. Owner occupiers’ housing costs (OOH) rose by 4.4% in the 12 months to June 2023, up from an annual rate of 4.2% last month and 3.2% a year ago.

The US data is even more encouraging. There the annual core consumer price inflation, which excludes volatile items such as food and energy, fell to 4.8% in June 2023, the lowest level since October 2021, from 5.3% in the prior month and below market expectations of 5%.

UK property

That UK property stocks drove a FTSE 100 rally after these inflation figure falls at least offers the prospect of an end to the recent bout of monetary tightening – hiking interest rates – by the Bank of England.

This policy has really hammered the property sector of late, putting intense pressure on the commercial property sector as their re-financing deadlines approach, also households as their mortgages renewal dates draw near, and the consequent knock on effects for rents.

Housebuilders will also breath a sigh of relieve if this trend continues as their construction programmes, many of which are in danger of going on hold, at a time when more homes are desperately needed, are extremely rate rate-sensitive. Not only that, a housebuilding slowdown would have a serious knock on effect to the resent of the UK economy.

UK Landlords

The UK property sector has gone through a challenging few months to say the least as the Bank of England has raised interest rates on 13 consecutive occasions since December 2021, in a bid to bring inflation closer to its target of 2%.

So far, the impact has been limited as it takes a long time (often 12 to 18 months) for changes to these rates to feed through the economic system and have any effect on the inflation figures. So these early indications of a fall in inflation are a sign of early optimism, very good news for hopes that mortgage rates will gradually come down and house prices stabilise.

Not out of the woods yet…

Barratt the house builder told the FT that demand for new homes had dropped by almost one-third in the year to June 30, and house builder Berkeley Group had said that sales of its new properties decreased 15 per cent for them on a like-for-like basis in the year to the end of April.

The 13 successive rate rises by the Bank had, “reduced buyers’ spending power, weakened sentiment in the UK property market and acted as a drag on activity”, that’s according to Chris Druce, a senior research analyst at property agents Knight Frank.

The modest reductions in inflation may be a good sign, but it’s perhaps unlikely at this stage to change a great deal. Mr Druce said: “Nerves are unlikely to be calmed and the outlook improved until buyers can gauge where the new peak in the bank rate will be.”
Others are warning that the Bank Rate has further to climb before the Bank can be satisfied that inflation has been squeezed out of the system and the inflation rate is definitely on the way back down to its target rate of 2 per cent. Some are predicting that mortgage rates could top 7 per cent before we’re done.

House prices & rents

According to the Halifax, a major mortgage provider, in June this year house prices fell at their fastest annual rate since 2011. An average rate on a two-year fixed mortgage just last week reached 6.66 per cent, the highest level since 2008.

The Office for National Statistics’ (ONS) latest data shows that private rental prices in the UK increased by 5.1 per cent in the 12 months to June 2023, the largest annual percentage change in data gathered by the ONS since January 2016.

[Source: ONS]

This puts tenants under increasing pressure as new tenancies reflect the latest market rent level. This result is, as the rental agent’s body Propertymark says, a “worrying mismatch” between demand and supply, which has added a lot of pressure to the rental sector in June 2023. There are, says Propertymark, an average of 13 new prospective tenants registering per available property.

Propertymark’s CEO, Nathan Emerson, says that:

“In terms of lettings, the number of properties available to rent is 19 per cent lower than last year, while the number of new prospective tenants registering per member branch is up 27 per cent over the same period.”

The small fall in the UK’s inflation data bodes well, and barring the intervention of extraneous events, this could be the watershed moment, but the turnaround won’t be fast and there could yet be more interest rate increases before inflation is fully under control.

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