Insight – what impact will the economic tug-of-war have on the property market?

With the Treasury and the Bank of England stepping in to try and calm the markets, talk of an emergency interest rate rise, the pound falling dramatically, and mortgage products being withdrawn, it’s safe to say that Kwasi Kwarteng’s mini-Budget was anything but mini – and has caused an economic earthquake that is still causing ripples.

It has also seemingly caused an economic tug-of-war between the Treasury, whose ‘orthodoxy’ Kwarteng has been keen to break to improve growth, and the Bank of England.

In light of the latest announcements from both the Chancellor and the BoE, Iain McKenzie, CEO of the Guild of Property Professionals, caught up with property market analyst and CEO of Twindig, Anthony Codling, for his views on the topic.  

McKenzie pointed to the apparent conflict at the moment between what the BoE is doing and what the government is doing.

“It looks like they are not singing off the same song sheet. On the one hand the BoE is raising interest rates because they are trying to curb spending and keep a handle on inflation, however, on the other hand we have a mini-Budget where the government is giving tax relief incentives to get the economy moving and people spending. So, who’s right and what is the thinking behind it?” he said.

Responding to this, Codling said the BoE’s target is to keep inflation under 2%. This is where inflation was until late last year, at which point it started to rise significantly and is now in double digit territory – not helped by the war in Ukraine and other factors.

“As consumers are aware, things are far more expensive now than they were a year ago. The bank’s main lever to tackle inflation is interest rates, with the theory that if it is more expensive to borrow money people and businesses will borrow less and will spend less, and some of the heat will be taken out of the economy keeping inflation under control.”

He added: “The flip side, as mentioned, is we have a budget that is expansionary. So, to me, I agree, it does look like the BoE and the government are trying to do two different things at the moment and it will be interesting to see what impact that has as we move forward.”

In last week’s most recent rate hike, when interest rates rose to 2.25%, Codling says the decision was a close one – a five/four split on the Bank’s Monetary Policy Committee, which meets to decide whether interest rates should rise, fall or stay the same.

Five of the MPC voted for the 50-basis point rise and four voted against it, suggesting the Bank is also conflicted when it comes to what to do about interest rates.

“The split was interesting in that three of the four people voted for 75-basis points and one for 25-basis points. My personal view was that they were in no-man’s land because they were flying blind against what the mini-budget was going to offer, which turned out to be the exact opposite,” Codling explains.

The reason there is speculation at the moment about a potential emergency MPC meeting to raise interest rates again, possibly as early as next week, is because we now have the lowest dollar/pound exchange rate since the mid-1980s, according to Codling.

This is an issue, he says, because so many things are priced in dollars, including oil.

“The exchange rate will make it more expensive for us to import things into the country, which again will make inflation go up, impacting the cost of living. On top of that the government is going to have to borrow a lot of money to pay for the tax cuts and the support on energy bills,” Codling added. 

“The rate at which the government is borrowing money has increased, which is also having a knock-on effect on the exchange rate. Ironically, how you would resolve that is by increasing interest rates to attract foreign investment into the UK to strengthen the exchange rate and reduce import inflation.”

McKenzie asked Codling how these aspects will impact the property market, with the analyst saying that if money is being put back into people’s pockets by tax relief and they are avoiding taking on debt because of interest rates, we could see more people saving.

“You could argue it will be good for the property market as people will potentially have more money in savings for their next house, which is kind of what we saw during lockdown,” he said.

“People couldn’t spend their money, which was a sort of enforced savings. They wanted more space and now had savings in the bank to be able to move. This created massive demand in the market and house prices went up. Looking at the data, house prices went up 16 times more than the savings you had on stamp duty. Hence the 15.5% growth figure recently released.”

Codling believes the dollar/pound exchange rate will actually have a positive impact on the London housing market as well as the high-end sector of the property market because overseas investors can suddenly purchase more property for their money.

But he also said the challenge to the property market is whether or not interest rate rises will cancel out the potential benefits of the stamp duty cut.

“Broadly, for every one percent increase of the interest rate, it will cost £50 more a month per £100,000 on a mortgage. That could soon eat into a stamp duty cut,” Codling said.

As a result of this, McKenzie said the feedback he is getting is that there is a race for a five-year fix on rates available in the market.

“That is stimulating activity market and data shows that buyer registrations are 20% higher than pre-pandemic levels, so there is still the desire to purchase property within the despite the economic challenges,” he explained.

Codling concurred, saying: “There is definitely a desire for property. And, rather than a race to take advantage of the stamp duty cut before it ends as we would if it was a holiday, we are seeing a race for buyers to lock in their fixed rate at their current levels. The market suggests that the interest rates could peak at around 5% to 5.5% in 2023, which shows how quickly things can change from the initial 2% to 3% initially predicted.”

When it comes to house prices, Codling believes there will still be some stock shortages during the short-term as people adopt a wait-and-see approach over the next few months. This, in turn, will result in prices continuing their upward trajectory if demand is sustained.

“Demand is already greater than supply and now we have the stamp duty cut, many people who have had their wages increased and taxes cut. This will all have a positive impact on house prices, especially in the medium term,” he concluded.