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Why we don’t expect a UK interest rate rise until November

Forecasts for UK interest rates have moved significantly.

The Bank of England, which ordered an increase from 0.25 per cent to 0.50 per cent in November, has signalled that it is ready to raise rates faster than previously thought.

The Bank’s closely watched quarterly Inflation Report, published last month, pointed to the prospect of excessive economic demand emerging by 2020, raising concerns about inflation.

But rather than the detail of what was said, it was perhaps the choice of words that were more significant.

Monetary policy, the report said, would need to be tightened “somewhat earlier and by a somewhat greater extent over the forecast period”.

The Bank’s hawkish communication spurred money markets to quickly bring forward expectations of the next rate rise to May.

We take a different view.

A November rate rise?

We don’t expect the first increase to happen until November, as this is consistent with previous market expectations, upon which the Bank had based its comments. Beyond that, we expect another two rises next year, taking the bank rate to 1.25 per cent by the end of 2019.

Why is our forecast for the first rise later than that of the market?

Firstly, we don’t believe the Bank expected its comments to shift expectations so far. If it does hike as early as May, then markets will quickly price in a rate rise every six months. That would mark a huge increase from the previous guidance that rate rises would be “gradual and limited”.

Secondly, many investors appear to have ignored the ending of the Term Funding Scheme in February.

The scheme, which provided below market cost liquidity to banks in order to encourage additional lending to the public, is estimated by the Bank to have been worth about a 0.25 per cent rate cut. It may already be having an impact on saving and lending rates.

Finally, it is worth remembering that the Bank assumes a smooth path to Brexit with regards to the impact on firms and households.

Given the small working majority the government has in the House of Commons, and the obvious divergence of views with regards to whether the UK should remain in the single market and/or customs union, a smooth path to Brexit seems like the least likely outcome.

For more on the outlook for world economies and interest rates:

Important Information: The views and opinions contained herein are those of Azad Zangana, Senior European Economist and Strategist, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The sectors and securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. This communication is marketing material.

This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

Source: City A.M.

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17 new homes could be built in Guernsey

Seventeen new houses could be built on a field near Vale School in Guernsey.

The island’s Planning Department have submitted a framework for developers to build on the agricultural land at Camp Dolent on Tertre Lane.

The site is 5-10 minutes walk from St Sampson main centre with Vale School and petrol stations nearby.

The Draft Development Framework gives a wide-range of guidance on the use of the plot, including:

  • Neighbouring residential development – There are no immediately adjoining residential properties. However, new development must respect the residential amenity of neighbouring properties to the south and west of Tertre Lane, including consideration of privacy and overlooking.
  • Access – The existing vehicular access is not suitable for a residential development of the scale proposed. Development on this site provides an opportunity to enhance pedestrian safety and access by providing a public footpath along Tertre Lane.
  • Design- Two storey buildings constitute a more efficient use of land than single storey buildings and therefore development proposals should consider a multi-storey design from the outset.
  • Renewable Energy – Proposals for the incorporation of renewable energy installations into the design of the development, such as solar tiles, is encouraged.

Based on the site, the Framework predicts between 8-17 dwellings.

Islanders are being asked to give their views before Friday 6th April.

Source: iTV

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Buy-to-let hotspots: Biggest profits made in 2017

The average profit made by landlords selling their property in 2017 was £86,651, according to Countrywide Monthly Lettings Index.

This figure was slightly higher than it was the year prior. In 2016, the average landlord selling their property made a gain of £86,302.

Across all of England and Wales, 88 per cent of landlords selling made a profit. ‘House price growth has driven investor gains. In 8 of those last 9 years house prices have risen,’ said Johnny Morris, Research Director at Countrywide.

However, Landlord gains were slightly behind owner occupiers, who on average made £92,886 when selling their home in 2017.

Unsurprisingly, gains were not spread evenly across all regions. London and the South East have seen the strongest growth in house price rises in recent years and so saw higher average profit of landlord sellers.

The average sale profit of a London landlord was £253,081. For the South East, that figure was £108,073.

Eight of the top 10 local authorities in England and Wales that made the highest percentage gains for landlords were based in London, with Brent topping the list (135 per cent average profit). Maldon in Essex (118 per cent) and Pendle in Lancashire (109 per cent) were the only two exceptions.

At the same time, the proportion of London landlords doubling their money from a sale was 28 per cent. By contrast, the South East saw significantly less landlords double their money, at 15 per cent, but still slightly above the national average.

The region did, however, see the highest proportion make a profit, at 97 per cent, with London slightly behind ay 96 per cent.

Other regions saw less attractive returns. However, as Morris notes: ‘Even in areas where price growth has lagged behind most landlords have made a profit from rising prices.’

Landlords in the North Eats made the smallest returns. Just 9 per cent of landlords in the region doubled their money and 25 per cent made no profit at all.

The area with the worst returns, however, was Selby in North Yorkshire. The average landlord here saw profits on sale of around 14 per cent, or £9,703 on average.

Source: Money Observer

 

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Sterling struggles to rise above $1.39 as Brexit nerves grow

Sterling climbed on Monday and held near the day’s highs as risk appetite prompted investors to buy the currency but concerns over progress in Brexit negotiations limited the gains.

“There is plenty of noise out there and while expectations of a UK rate hike is about 70 percent priced in by markets, the outcome of the talks later this month is key,” said Marc Ostwald, a global strategist at ADM Investor Services International in London said.

The pound rose 0.4 percent to $1.3905, broadly in line with gains registered by other currencies against the dollar, but it is still some way below a post-Brexit referendum high of $1.4346 in late January.

Strong U.S. job growth data on Friday was balanced by slower increases in wages, resulting in money market traders sticking to bets that the Federal Reserve would raise interest rates three times this year. This encouraged investors to add bets against the struggling dollar.

Sterling also edged 0.2 percent higher to 88.65 pence to the euro.

Latest positioning data also indicated an undercurrent of nervousness about the British currency, with net long sterling positions slashed to their lowest since early December.

Worries have grown that Britain and EU officials would fall short of securing a transition arrangement at a March 22-23 summit as differences have grown in recent days. Such an outcome would question market expectations of a 25 basis point rate increase by the Bank of England in May.

“We expect euro/sterling to be volatile ahead of the summit due to conflicting headlines we have seen in recent weeks and as such we remain cautious on the British currency’s outlook,” said Morten Helt, a currency strategist at Danske Bank.

Money markets are pricing in a 70 percent probability of another UK rate rise by May, compared with virtually nil in January.

Finance minister Philip Hammond looks set to announce Britain’s smallest budget deficit since 2002 this week but he is still likely to resist calls to loosen his grip on public spending for now.

Source: UK Reuters

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Best buy-to-let mortgage rates for landlords revealed

It’s almost two years since a flood of prospective landlords snapped up rental properties before the buy-to-let stamp duty hike came into force – and for many, their initial rate is about to expire.

In November 2015, then-Chancellor George Osborne announced plans to charge an extra 3% on each tier of stamp duty for buy-to-let properties and second homes costing more than £40,000.

This led to a flood of investors rushing to complete on buy-to-let property purchases before the changes came into force the following April. If you were one of those investors and your two-year introductory rate is coming to an end, we’ve scoured the market to bring you the best buy-to-let mortgages currently available.

Buy-to-let mortgages: best two-year fixed rates

The following deals are based on a £165,000 property, borrowing £125,000 over 25 years.

Best buy-to-let mortgage rates for landlords revealed Commercial Finance Network

Buy-to-let mortgages: best five-year fixed rates

According to Moneyfacts, the average interest rate for a five-year fixed-rate buy-to-let mortgage is currently 3.43%.

A rate this low has only ever been recorded once before, in October 2017, so taking out a five-year deal now could be a savvy move – especially with a potential base rate rise on the horizon.

The deals below are based on the same scenario as the two-year deals listed above (a £165,000 property, borrowing £125,000 over 25 years).

Best buy-to-let mortgage rates for landlords revealed Commercial Finance Network

Is now a good time to take out a fixed-rate mortgage?

In February, we reported that mortgage interest rates may start to increase due to the end of the Term Funding Scheme (TFS).

Many market analysts are predicting a base rate rise in May, which is also likely to have a knock-on effect on mortgage rates.

This means that now could be a good time to take out a fixed-rate mortgage and lock in a low rate before interest charges creep up.

What to bear in mind when remortgaging

With any mortgage, it’s worth regularly checking whether you’re on the best deal for your circumstances. This is particularly true if you’re on a fixed-rate deal and the introductory interest rate is coming to an end.

For most deals, you’ll revert to the lenders’ standard variable rate – meaning the amount you’re paying will usually jump significantly. However, you should always weigh up the total cost of remortgaging before signing on the dotted line.

Most mortgages carry early repayment charges – often over £1,000 – which you’ll have to pay if you exit the deal before the full mortgage term. Many mortgages also carry fees that you pay when applying. The total cost of these charges may mean that a small drop in interest rate isn’t worth switching for.

All change in the buy-to-let sector

A number of things are changing for landlords this year. From April, newly bought rental properties will need to have an energy efficiency rating of E or above.

By 2020 this rule will have been extended to cover all existing rental properties. April will also see the amount of tax relief that landlords can claim on their mortgage interest drop from 75% to 50%.

It’s likely that lettings fees will be banned this year, and landlords will soon have to register with an ombudsman scheme.

Source: Which

 

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London house prices dip while rest of UK continues to grow

House prices in London fell last month, even as the rest of the UK continued to grow.

The average Greater London house price was down 0.8 per cent on the month to £593,396. This represented a 2.6 per cent drop in prices since this time last year, according to Your Move.

The biggest annual drops were seen in Wandsworth (14.9 per cent), Southwark (12.2 per cent) and Islington (8.8 per cent).

Boroughs which started out with lower prices fared better. Bexley’s average house price was up 4.5 per cent to £363,082. Waltham Forest was the only area to set a new peak average price, of £464,872.

But overall the cheapest third of London’s borough still saw a fall in prices, down 0.5 per cent on a year ago.

Transactions in London were also down five per cent in the three months to January 2018.

This contrasted with the national picture, as annual house prices for the UK grew 2.5 per cent excluding London and the South West. But with the dip in the capital and the Home Counties included, the growth was only 0.6 per cent, compared to 0.7 per cent last year.

Oliver Blake, managing director of Your Move and Reeds Rain estate agents, said: “When examining the bigger picture, house prices are steadily balancing to meet the needs of house buyers which is welcome news for those looking to take their first steps onto the property ladder.”

But he added that housing supply is still not meeting demand.

“The industry needs to work together to provide a long-term solution to increase movement within the market,” he said. “By building more homes and introducing more initiatives for each stage of the property lifecycle we should start to see more choice for first time buyers, second steppers and last-time buyers.”

Source: City A.M.

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The everyday scenarios where you could be hit with the stamp duty surcharge

You may think the 3% stamp duty surcharge is reserved for buy to let landlords and second home buyers. But these ordinary family scenarios show where unsuspecting people may be caught out by a larger tax bill.

The stamp duty (SDLT) surcharge was introduced in April 2016, adding 3% to the usual stamp duty rates on buy to let properties and second or holiday homes.

While well intentioned, the stamp duty surcharge has actually brought some unsuspecting homeowners and homebuyers into scope of the additional 3% tax bill.

Nick Morrey, product technical manager at John Charcol, says: “Like many taxes there are plenty of scenarios that have been unexpectedly caught up in George Osborne’s additional stamp duty net.

“Property transactions have a variety of nuances and mechanisms that can potentially affect the nature of a qualifying purchase. Some of these could help reduce or even eliminate this liability. Therefore, it is important to take independent tax advice from an accountant or tax adviser in conjunction with a good mortgage broker to ensure you only pay what you need to pay. It’s important to check these things as not all options are appropriate to all consumers.”

Here are three scenarios to watch for and what, if anything, you can do to minimise the charge:

1) Adding partner to mortgage and title deeds

More and more Brits are cohabiting rather than rushing down the aisle. But when it comes to finances, Brits may show more commitment to their partner via shared bank accounts and joint house purchases.

Here, Michael and his former partner bought their property together but after splitting, Michael kept the £350,000 flat. He has a new partner, Lisa, and they have baby George and the family live in Michael’s flat. Lisa also owns her own property which she rents out.

Michael was keen to add Lisa to the mortgage and the title deeds of the flat so that it is considered their family home for estate planning reasons.

But by adding Lisa onto the mortgage and the deeds, this is technically buying a UK residential property while already owning an existing property.

Michael and Lisa were told that as the mortgage was £180,000, half the consideration (the part that is used to calculate stamp duty on transfers of equity), was £90,000, meaning they would need to pay £2,700 in stamp duty.

However, the couple decided on becoming ‘tenants in common’ rather than joint tenants so Lisa would own 20% and Michael would own 80%. This reduced Lisa’s chargeable consideration below the £40,000 stamp duty threshold, helping the couple avoid the tax altogether.

David Hannah, principle consultant and founder of stamp duty experts, Cornerstone, explains further: “No surcharge is due, provided the share of the partner was kept below £40,000 in value, as the property is mortgaged and Lisa is still assuming the value of the debt to be equal to her portion. Once the mortgage is repaid, the couple should re-evaluate ownership of the property to ease inheritance issues in the future.

“Even if the share were to be gifted to Lisa, as the property is mortgaged, her assumption of responsibility for a proportion of the mortgage debt is still classed as ‘consideration’ for the purposes of calculating SDLT. Therefore, the restriction of the share to below £40,000 would still be necessary to avoid incurring the surcharge.”

However, if Michael and Lisa were married in this scenario, then HM Revenue & Customs confirms no surcharge will apply. The law on the stamp duty surcharge was changed in the November 2017 Budget to disregard transactions involving ‘exchange of interests between spouses and civil partners’.

2) Brothers inherit property and one wants to buy the other out

Steven and Tom inherited an equal 50/50 share of their grandfather’s property. Here, the resulting tax charge depends on whether the brothers already own their own properties.

Hannah explains: “Should the brother buying out the other already own a residential property, his assumption of full ownership of a separate property (presumably valued above £40,000) would attract the surcharge.

“However, should the brother (buying the other one out) not own a separate property, this would not be the case. If the property is inherited jointly and a party inherits 50% or less of the value in the three years before they make a purchase of a separate residence for themselves, the surcharge will not apply.”

3) Sisters bought a home together but want to buy separately

Ellen and Claire bought their property over three years ago as first-time buyers. But during that time, Ellen’s got married and Claire is in a serious relationship.

Currently, Ellen and her husband live in the property while Claire has moved out to live with her partner.

They now want to sell the property and buy with their respective partners, both of whom are first-time buyers.

Hannah explains the situation: “If they sell the property before they buy their new respective properties with their partners, then the surcharge would not apply. If they sell the property after they purchase their new properties, the surcharge will apply on each of the onward purchases, and will be based on the purchase price of each property.

“They would each pay the regular SDLT due on the new purchase, plus an additional 3% surcharge on each banding of SDLT – 3% on the first £0 – £125,000 of the purchase price, 5% on the next £125,001 – £250,000, and so on.”

Source: Your Money

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Social housing stock has fallen over the last 30 years

The size of the social housing sector has been decreasing over time.

The proportion of the population living in social housing in Great Britain halved between the early 1980s and early 2010s, according to the Institute for Fiscal Studies. The IFS puts this down to two key developments: the introduction of Right to Buy in 1980, which gave tenants the ability to buy their council houses at below market rates, and a general drop in the amount of social housing being built.

The number of homes for rent from councils or housing associations in the UK has been decreasing from a peak of around seven million in the early 1980s to just under five million in 2014.

In contrast the number of homes available for private rental has increased from around two million to over five million.

Social housing stock has fallen over the last 30 years Commercial Finance Network

Social housing usually refers to homes rented at sub-market levels by councils and housing associations. “Social rent” levels are around 50% of market levels. The government also includes “affordable rent” homes in its definition of social housing, these are up to 80% of market levels.

There were around 5,000 homes for social rent built or acquired in England in 2016/17 compared to 24,000 for affordable rent.

Affordable rent properties were first introduced in 2011 and since then their number has increased significantly while the number of social rent properties has decreased.

Social housing stock has fallen over the last 30 years Commercial Finance Network

Source: Full Fact

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Construction sector records worst decline since 2013 as new work dries up

Output in Britain’s construction industry fell at the fastest annual pace for five years in January as a slowdown in commercial developments and house-building hit the sector hard.

Figures from the Office for National Statistics show that output fell by 3.9%, the biggest year-on-year decline since March 2013.

Monthly figures also made for grim reading, falling 3.4% between December and January, while new orders decreased by 25% in the fourth quarter.

Economists had expected a monthly decline of just 0.5%.

“Construction continues to be a weak spot in the UK economy with a big drop in commercial developments, along with a slowdown in house-building after its very strong end to last year,” ONS senior statistician Ole Black said.

Investment in commercial developments, particularly in London, has fallen off a cliff since the Brexit vote as higher construction costs and uncertainty has seen developers delay new schemes.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Commercial work will continue to fall if, as we expect, progress in Brexit talks remains slow.

“We doubt that house-building will recover fully soon. The prospect of further increases in interest rates is subduing buyer demand both for new and existing homes.”

The ONS data dump also included figures which show that Britain’s industrial production rebounded in January following a boost in manufacturing and North Sea oil and gas production.

Manufacturing grew 0.1% in January month on month, representing the ninth month in a row of growth for the first time since records began in 1968 as factories benefit from strong global demand and a weak Brexit-hit pound.

Industrial production grew 1.3% in January, with growth driven mainly by the reopening of the Forties oil pipeline, which was shut down for three weeks after a crack was discovered in December.

Mining and quarrying provided the largest upward contribution, increasing by 23.5%.

“Manufacturing has recorded its ninth consecutive month of growth but with a slower start to 2018. Total production output continues to advance, bolstered in January by the Forties oil pipeline coming back on stream after December’s shutdown,” Mr Black added.

Figures also showed the UK trade deficit widen by £3.4 billion in good and services to £8.7 billion, with the ONS citing rising oil prices making for more expensive fuel imports, which rocketed 21.4%.

This contributed to a £3.2 billion widening of the trade in goods deficit.

Source: BT.com

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Most Britons expect Bank of England to raise rates in next 12 months – BoE survey

Most British people expect the Bank of England to raise interest rates again over the next 12 months, in line with indications given by the central bank, a BoE survey showed on Friday.

The BoE said 58 percent of people surveyed between Feb. 7 and Feb. 18 said they expected rates to rise, compared with 63 percent in its last poll conducted in November, just after the BoE raised rates for the first time in more than a decade.

Last month BoE Governor Mark Carney said rates might need to rise sooner and by somewhat more than the central bank had expected to get inflation back to target.

British consumer price inflation rose to its highest in more than five years in November at 3.1 percent, and stood at 3.0 percent in January. The BoE expects inflation will remain above its 2 percent target for the next couple of years.

Friday’s poll showed no change to households expectation for inflation over the next two years, with expectations holding at 2.9 percent for the next 12 and 24 months.

A Reuters poll on Thursday showed that a majority of economists expected the central banks to raise interest rates next in May, and financial markets see a high chance of a further increase before the end of the year.

Source: UK Reuters