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The Bank of England will almost certainly hike rates in May

The question of the next rise in UK interest rates has shifted definitively from if to when.

Last week an uncharacteristically hawkish press conference by the Bank of England Governor Mark Carney left the markets in little doubt that it could come as early as May.

At the start of the week the probability of a May rate hike rose was rated as 50 per cent, yet by Friday this had risen to 80 per cent.

That momentum will have been strengthened by the confirmation yesterday that UK Consumer Price Inflation stayed at 3 per cent in January, confounding economists’ forecasts that it would nudge down to 2.9 per cent.

There are several potential explanations for inflation staying so far above the Bank of England’s 2 per cent target. But the main one alluded to by Governor Carney last week was that there is very little spare capacity left in the economy.

In other words, the UK economy is close to full employment. This should be a cause for celebration; as full employment tends to also signify wage rises, business investment and rising productivity.

All of which are good in themselves, but also because such a collection of indicators should theoretically mean the economy is expanding by more than most current forecasts suggest.

Good vs bad inflation

Not only that, but dig down into the Office for National Statistics (ONS) inflation data for January and food prices are coming down. In fact, one of the main drivers of inflation in January seems to have been higher fuel prices – which are determined by the vagaries of the global oil market rather than the fundamentals of the UK economy – which still rose by less than they did this time last year.

So this could be good inflation: inflation driven by rising wages, driven by full employment and a growing economy rather than driven by a weak Pound inflating imports and input costs.

But the problem for the Bank of England is that it will have to play a waiting game before it really knows which type of inflation Britain is experiencing.

The answer is unlikely to come before April, when the UK’s first quarter GDP numbers will be published. That data is very likely to determine whether the Monetary Policy Committee (MPC) hikes interest rates the following month.

Brexit

If GDP is weak, the MPC might stay its hand, but if the UK is benefitting from the global economic boom as many think it currently is, the GDP figure should be relatively strong.

The MPC will hope the economy is strong enough to withstand a rate hike because, as mentioned before in this column, it will want rates to be high enough for it to have the option of reducing them to mitigate the potential economic shock when Britain leaves the European Union (EU) 10 months later.

But even if GDP is not that strong in the first three months of 2018, the Bank could still push ahead with a May rate rise.

Above target inflation and weak economic growth as Britain heads for the EU exit is highly undesirable.

Take back control

The MPC may have essentially made up its mind to act already. In which case, Tuesday’s inflation data will have confirmed to Mr Carney that hiking rates to bring inflation under control more quickly rather than letting it fall naturally is the right course of action.

Sadly such sophistry will provide zero solace to hard-pressed households struggling because the cost of living is still outpacing average monthly wage rises.

And while that could change as the year progresses, we are all stuck between interest rates and inflation: either way costs are going up. The only difference is that hiking interest rates gives the Bank some semblance of control.

Source: City A.M.

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More houses make for a better balance

The plight of leasehold new build home owners has been well documented and earlier this year the government moved to ban such arrangements going forward.

But if anything, this episode highlighted the conflicts in the home-buying chain that means a customer’s welfare is not always at the heart of the process – even though it should be.

The number of leasehold houses in England is significantly higher than previously estimated, according to the Department for Communities and Local Government. It estimated in September that there were 1.4 million leasehold houses in England in 2015-16, compared with the previous estimate of 1.2 million in 2014-15, following a change in methodology to include socially rented properties.

For those trapped in leasehold houses, there is a long road to travel. The government has said it will consider what it can do to help the hundreds of thousands of existing leaseholders who face “onerous” annual payments.

While some lenders have stepped back from the market, finger pointing has already begun. But regardless of where the blame for this episode lies, the entire development in new build highlights a paradox. It’s unlikely that in any other walk of life you would buy or undertake such a large financial commitment with unknown or very onerous foreseeable liability.

The question is what causes people to throw caution to the wind or at least ignore their better instincts. Home buying is for most people an emotive business and combined with the inexperience of first-time buying, it’s easy to see how many can end up on the wrong side of a bad deal.

Notwithstanding all the advice out there, or perhaps in ignorance of this counsel, first-time buyers do exactly this every day of the week. While many are correctly advised of these facts by their conveyancer it seems clear the lack of supply again has enticed people to sacrifice the mid-term financial downside for the immediate ability to get a house.

A lack of supply has once again led to consumer detriment, which is why it is so important we endeavour to address this national housing crisis. By re-adjusting the odds in favour of buyers, we can mitigate their purchase risks.

Source: Mortgage Finance Gazette

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Space on brownfield land to build up to one million new homes

There is enough space on brownfield land to build at least a million new homes, research by the Campaign to Protect Rural England (CPRE) has found.

The analysis of Brownfield Land Registers reveals that over two thirds of these homes could be deliverable within five years, and many of these sites are in areas that have a high need for housing.

CPRE found that the 17,656 sites identified by local planning authorities, covering over 28,000 hectares of land, would provide enough land for at least 1,052,124 new homes, which it says could rise to over 1.1 million once all registers are published.

According to CPRE, this means that three of the next five years’ worth of government housing targets could be met through building on brownfield land that has already been identified.

This would ease pressure on councils being pushed to release greenfield land, and would mean that less of the UK’s countryside would be used for new builds.

London, the north west, and the south west were identified as having the highest number of potential deliverable homes, with the new registers giving minimum housing estimates of 267,859, 160,785 and 132,263 respectively.

The registers found sites for over 400,000 homes that have not yet come forward for planning permission, despite the “urgent need” to move sites towards development.

More than a third of these sites are on publicly owned land, and CPRE argues that as public authority developments should give a significant opportunity to provide affordable homes, it provides an opportunity for homes to be built on brownfield land to help towards local need.

Additionally, further analysis showed that there is brownfield capacity wherever there is threat to the green belt.

It found that in a number of areas with an extremely high number of green belt sites proposed for development, local authorities have identified enough brownfield land to fulfil up to 12 years of housing need.

Rebecca Pullinger, planning campaigner at the Campaign to Protect Rural England, called it “fantastic news” that authorities have identified so many brownfield sites that are ready to be developed.

She said: “Contrary to what the government, and other commentators have said, brownfield sites are also available in areas with high housing pressure.

“Indeed, our analysis is conservative with its estimates of potential number of homes that could be built – the figure could much higher if density is increased and if more registers looked at small sites.”

She called on the government to amend its guidance to ensure that councils have identified all of the brownfield sites in their areas, and to improve incentives to build on these sites and ensure that they follow through on their commitment for all new builds to be on brownfield first.

In order to make use of suitable brownfield land, CPRE has called on the government to use the upcoming review of the National Planning Policy Framework (NPPF) to introduce a “brownfield first” approach to land release and granting planning permissions for development.

It argues that local authorities must be empowered to refuse planning permission for greenfield sites where there are suitable brownfield alternatives.

Source: Public Sector Executive

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House prices grew by 5.2% in 2017

House prices grew by 5.2% in the year to December 2017, up from 5.0% in the year to November 2017, the ONS House Price Index found.

The UK Property Transaction Statistics for December showed that the number of seasonally adjusted transactions on residential properties with a value of £40,000 or greater has decreased by 0.1% in the year to December 2017.

Jeremy Duncombe, director, Legal & General, said: “As 2017 drew to a close with house prices rising at healthier levels than in previous year, we are certainly on a stronger footing for coming months.

“House prices are now far more aligned with wage inflation than in previous months and couple this with competitive mortgage rates, first-time buyers should find it that little bit easier to get onto the property ladder.

“However, the issue of affordability has not gone away, and for those concerned, speaking to a broker can be a great starting point.”

Between November 2017 and December 2017, transactions decreased by 3.9% with the average price of a property being £226,756.

On the supply side, the Royal Institution of Chartered Surveyors reported their net balance for new instructions remained negative for the 24th consecutive month.

Stock levels reported by estate agents remained broadly stable; still close to historic lows. Their three month outlook for national sales expectations remained flat, whilst there is greater optimism for the twelve month outlook.

Jeff Knight, director of marketing at Foundation Home Loans, said: “It’s not been the best start to the year for sellers. People are holding off until they are in a better position to make such a big financial commitment, held back by lack of disposable income.

“That doesn’t change the fact that property prices are still inflated, underpinned by the lack of supply, and pent-up interest will continue to nudge properties just out of reach for those hoping to buy – even with the cut to stamp duty.”

Looking at English regions, the largest annual price growth was recorded in the South West at 7.5%, up from 6.1% in the previous month.

It was followed by the East and West Midlands, both growing at 6.3%. At 2.5%, London showed the slowest annual growth of all UK regions, though this is up from 2.0% in the previous month.

This is the 13th consecutive month where the annual growth in London has remained below the UK average. Yorkshire and The Humber was the second slowest region, growing at 2.8%.

Average house prices in the UK have increased by 5.2% in the year to December 2017, up from 5.0% in the year to November 2017.

The largest annual price growth was recorded in Scotland, where house prices increased by 7.7% over the year to December 2017.

John Goodall, chief executive and co-founder of Landbay, said: “Demand in the property market has been reinforced by a wave of first-time buyers capitalising on November’s stamp duty reforms.

“The changes have made it easier for aspiring homeowners to afford a place of their own, but over the longer term will likely push up prices for starter homes.”

In England, the average price increased by 5.0% over the year while Wales saw house prices increase by 5.4% over the last 12 months.

The average price in Northern Ireland increased by 4.3% over the year to quarter 4 (October to December) 2017.

Jean-Michel Six, EMEA chief economist at S&P Global Ratings, said: “Housing market activity in the UK continues to stagnate.

“The number of new mortgages approved, sale instructions, buyer inquiries and stock on the market continues to move broadly sideways, with some of these measures remaining one-third below pre-crisis levels.

“Furthermore, the limited number of properties on the market continues to underpin prices.

“We forecast that house prices in the UK will grow by 0.5% in 2018, 1.5% in 2019, and by 3.5% in 2020.”

Source: Mortgage Introducer

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UK inflation sticks at nearly six-year high in January

British inflation unexpectedly held close to its highest level in nearly six years in January, highlighting the challenge facing the Bank of England and reinforcing expectations of a rise in interest rates in May.

Consumer price inflation held at an annual rate of 3.0 percent in January, unchanged from December, after hitting its highest since March 2012 in November at 3.1 percent, the Office for National Statistics said.

Sterling rose after Tuesday’s data and was up by 0.5 percent against the dollar at 1035 GMT. British government bond prices fell in contrast to a rise in the price of German bunds.

Inflation jumped in Britain after the June 2016 decision by voters to leave the European Union, which hammered the value of the pound and pushed up the cost of imports.

By contrast, many other countries are facing below-target inflation despite strong economic growth.

The BoE surprised investors last week by saying interest rates would need to rise sooner and by somewhat more than it had previously expected, as it wanted to get inflation back to target within two years rather than three.

Markets priced in as much as a 70 percent chance of a quarter-point rise in interest rates by May, and a roughly 50 percent chance of a further increase in rates to one percent by the end of the year – a level last seen in 2009.

Economist Lucy O‘Carroll of Aberdeen Standard Investments said inflation appeared to have peaked as the impact of the pound’s fall after the Brexit vote began to fade.

Nonetheless, signs of a pick-up in wages suggested that price growth might be slower to fall than the BoE hoped.

“Even if inflation drops back a bit further from here, it looks likely to settle at a higher level than the Bank of England feels comfortable with. It will also mean slightly higher interest rates than we’ve been used to,” she said.

Tuesday’s CPI data showed downward pressure on inflation from a lesser increase in fuel prices than a year ago. But the ONS highlighted a smaller than usual seasonal decline in the cost of visiting zoos and gardens as pushing up on price growth.

Core consumer price inflation – which excludes food, energy, alcohol and tobacco – rose to 2.7 percent from 2.5 percent, and services price inflation, which is more sensitive to wage costs, also accelerated.

BoE policymakers have pointed to rising wages as a possible reason to increase rates, although headline data still shows average growth in weekly earnings well below the rate of inflation, squeezing on living standards.

The ONS figures suggested less pressure in the pipeline for food and manufactured goods.

Among manufacturers, the cost of raw materials – many of them imported – was 4.7 percent higher than in January 2016, the smallest increase since July 2016. Economists polled by Reuters had expected input prices to rise by 4.2 percent.

Manufacturers increased the prices they charged by 2.8 percent less than the consensus forecast of 3.0 percent and the smallest increase since November 2016.

Source: UK Reuters

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Landlord Buy To Let Mortgage Repayments Becoming Problematic

The number of buy to let investors who are behind on mortgage repayments has grown by 20 per cent in just one year, according to figures from UK Finance.

During the last three months of 2017 there were 1,200 buy to let mortgages in significant arrears of 10 per cent on higher. This is up a fifth in comparison to the same period the previous year. There were two per cent more mortgages in arrears of 2.5 per cent or more of the balance in comparison to 2016.

The number of buy to let properties that were repossessed in the fourth quarter of 2017 stood at 600, similar to the same quarter of the previous year.

The highest number of landlord repossessions across the country were found in London.

The problem was not limited to the buy to let sector. The figures showed that there were 24,700 homeowners mortgages behind on repayments by 10 per cent in the fourth quarter of 2017. However, this is largely the same as the previous year.

Head of mortgages at UK Finance, Paul Smee, explained: ‘Annual homeowner possessions currently stand at a 36-year low, with overall arrears and possessions continuing to decline. This reflects the mortgage industry’s continued commitment to appropriate and prudent lending. All potential borrowers are carefully assessed against their ability to pay back their loans, and lenders work closely with their customers to ensure that any payment issues are dealt with at an early stage. Anyone experiencing difficulty with their mortgage should contact their provider immediately.’

Managing director of Spicerhaart corporate sales, Mark Pilling, added: ‘Spicerhaart has also seen a growing trend of increasing repossessions in London, and it is not just lower cost houses, we have also seen an increase in repossessions of properties worth multi-millions. I think this is becoming more prevalent as interest-only deals from the 90s come to an end and landlords in London struggle to sell their properties at the prices they need to in order to clear their debt.’

Source: Residential Landlord

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An introduction to crowdfunding

Crowdfunding is an increasingly popular alternative method of raising finance. But what is crowdfunding? In this article we explain how crowdfunding works, the risks and rewards and the UK regulation.

What is crowdfunding?

Crowdfunding is the practice of raising money from a large number of individuals for the purposes of financing a project, venture, business or cause. Traditionally, crowdfunding has been carried out via subscriptions, benefit events and door-to-door fundraising. However, today the term is typically associated with raising money through website platforms, which allows crowdfunding to reach a larger pool of potential funders.

How does crowdfunding work?

Crowdfunding usually takes place on a light-touch online platform rather than through banks, charities or stock exchanges. The business or individual seeking finance will typically produce a pitch for their business, project or venture, which is then uploaded to the online platform with the aim of attracting as many loans, contributions and investments as possible. Websites such as Kickstarter, Seedrs and Crowdcube are examples of the available online platforms, which enable project initiators to reach a pool of thousands, if not millions, of potential funders.

What are the different types of crowdfunding?

Crowdfunding can broadly be split into four main categories:

  1. Loan-based: also known as peer-to-peer lending (P2P), this involves individuals lending to businesses or other individuals in return for interest payments and a repayment of capital over time.
  2. Investment-based: individuals invest directly or indirectly in new or established businesses by buying investments such as shares, debt securities or units in an investment scheme.
  3. Donation-based: people give money to individuals, organisations or enterprises they want to support, with no expectation of any return on their investment.
  4. Pre-payment or rewards-based: individuals give money to receive a reward, product or service (for example, concert tickets, artwork, a new product etc.).

In addition, less-common forms of crowdfunding exist whereby funders invest in order to receive, for example, software value tokens (see A guide to initial coin offerings) or a share of the compensation from the results of litigation.

Crowdfunding examples

Crowdfunding’s success is not just limited to industry – it has been used to successfully raise funds for a range of not-for-profit organisations and charitable causes. Children’s charity, Kids Company, successfully raised over £100,000 in under two months in 2014/15 with their campaign on the platform Crowdfunder. In 2016, crowdfunding campaigns raised £12.3 million on the platform JustGiving, a platform for online charitable donations.

That said, businesses are also benefiting from crowdfunding initiatives. Starting in 2007 as a two-man partnership, BrewDog successfully crowdfunded their way (using an equity-based platform) through year-on-year growth to become an international company valued at circa £1 billion in 2017. Perkbox, a cloud-based employee perks and engagement platform for businesses, raised circa £4.3 million with its campaign on Seedrs. Finally, in 2016 Crowdcube raised circa £6.7 million, effectively making the crowdfunding platform its own biggest success story.

How is crowdfunding regulated?

In the UK only certain crowdfunding activities are regulated. Donation-based and rewards-based crowdfunding are not regulated, whereas firms carrying on activities associated with loan-based or investment-based crowdfunding may require FCA authorisation under the Financial Services and Markets Act 2000 (FSMA). Accordingly, what follows is a high-level summary of the regulation of both loan-based and investment-based crowdfunding in the UK.

Loan-based crowdfunding

The platforms

In 2013, with loan-based crowdfunding becoming an increasingly popular means of raising money and recognising that it was difficult to regulate the practice under existing regulatory provisions, the FCA took the step of adding a new activity, at article 36H, to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO).

Under article 36H of the RAO, loan-based crowdfunding became regulated as the “activity of operating an electronic system in relation to lending“. Under this provision, online platforms facilitating loan-based crowdfunding between two individuals or between individuals and businesses will be carrying on a regulated activity and will, therefore, require FCA authorisation (unless certain exemptions, such as for charities or appointed representatives apply).

Regulated platforms will be required under the FCA rules to comply with certain consumer protections around the clear disclosure of information and the protection of customer funds.

The participants

Generally speaking, where the borrower is an individual (or a partnership or unincorporated body of individuals), and the investor is lending in the course of a business, the terms upon which the loan is made may constitute a regulated credit agreement and consequently be subject to the full requirements of the Consumer Credit Act 1974 (CCA). The investor will then need appropriate FCA authorisations for the provision of consumer credit and will be required to comply with the relevant rules in the FCA Handbook (CONC in particular). To help with this, the FCA has published a webpage, which provides a useful summary of the key provisions of the FCA Handbook that apply to loan-based crowdfunding firms.

Where the investor is not acting in the course of business, so that the agreement is a non-commercial agreement under the CCA the investor will not require FCA authorisation. There are, however, additional obligations on the operators of the platforms in CONC to help protect consumers from some of the risks associated with these non-commercial agreements.

Participants acting by way of business should also take care not to inadvertently carry out other regulated activities when crowdfunding. In this context, the FCA has warned that businesses which borrow through a crowdfunding platform with a view to lending this to other individuals may be carrying out the regulated activity of accepting deposits – which will require additional authorisation.

Investment-based crowdfunding

The FCA regards investment-based crowdfunding as a high-risk investment activity, with the potential for capital losses. This is likely due to the fact that the instruments traded on such investment-based crowdfunding platforms are non-readily realisable securities that are not listed on regulated stock markets and are instead traded over the internet and via other means.

The platforms

Unlike the bespoke regulatory rules for loan-based crowdfunding, activities associated with investment-based crowdfunding platforms typically fall under the existing rules, including article 25 of the RAO which covers both arranging deals in investments and making arrangements with a view to participating in deals in investments. Accordingly, online platforms facilitating investment-based crowdfunding are likely to be carrying on a regulated activity and therefore require FCA authorisation.

While the FCA has not published a webpage summarising the FCA Handbook provisions applicable to investment-based crowdfunding, it is thought that many of the provisions applicable to loan-based crowdfunding will be relevant to investment-based crowdfunding.

The FCA introduced further rules around financial promotions applicable to firms operating investment-based crowdfunding platforms in 2014. As a result, such firms may only make direct offer financial promotions to retail clients if such clients either:

  • have taken regulated advice
  • are high net worth or sophisticated investors (as defined in the COBS provisions of the FCA Handbook)
  • have confirmed that they will invest less than 10% of their net assets in the relevant investment.

Regulated platform operators must also be able to assess whether retail clients understand the risks involved with investing if they do not take regulated advice – the FCA expects this to be done as part of the online registration process for the platform.

The participants

Businesses buying and selling investments through crowdfunding platforms should take care not to accidentally fall within the UK’s regulated activities and financial promotions regime. In particular, businesses contemplating raising equity finance via investment-based crowdfunding platforms should be careful not to fall foul of the restriction on offers to the public under section 755 of the Companies Act 2006. For more information on the implications of this legislation on investment-based crowdfunding, see our previous article Crowdfunding: restriction on ‘offers to the public’.

How is regulation likely to change/develop in the future?

In December 2016, the FCA published a feedback statement (FS16/13) in response to their previous call for input to the post-implementation of their crowdfunding rules. Following the publication of the feedback statement, the FCA has indicated that it intends to consult on, among other things, additional requirements relating to wind-down plans, cross-investment of loans on different loan-based crowdfunding platforms and mortgage lending standards where the investor is not lending by way of business.

In addition, the FCA has raised concerns regarding the quality of communications with potential investors on loan-based and investment-based crowdfunding platforms. Accordingly, it intends to consult on more prescriptive rules in respect of financial promotions and the content and timing of disclosures.

What is the UKFCA code of conduct?

The UK Crowdfunding Association (UKCFA) is a self-regulatory body that was set up in 2013 with the purpose of promoting the interests of crowdfunding platforms, their investors, and clients. Members of the UKCFA are required to agree to the code of conduct which, among other things, promotes and implements transparency, security, appropriate safeguards and compliance with applicable laws and regulations.

What are the benefits of crowdfunding?

Investors

  • Involvement – investors may find it rewarding to be involved in the development of a specific business, project, venture or cause. Crowdfunding enables potential funders to choose how they invest their money more freely.
  • Returns – crowdfunding may offer investors higher returns than those available from other, more traditional, financial products.
  • Costs – by obviating the need for various intermediaries such as brokers, investors may receive benefits via reduced search and transaction costs.

Borrowers

  • Accessibility – crowdfunding enables borrowers to access finance where it may not necessarily have been available to them from banks or other institutional lenders.
  • Numbers – crowdfunding enables individuals and businesses to receive finance from a potentially unlimited pool of investors and with relatively low associated access costs.
  • Exposure – raising finance via crowdfunding provides borrowers with significant exposure may help to raise the borrower’s profile and provides them with free access to market feedback.

What are the risks of crowdfunding?

Investors

  • Information asymmetry – potential funders may face the problem of information asymmetry and find that they lack the ability to conduct proper due diligence on the borrower.
  • FSCS – investment via crowdfunding platforms does not provide the investor with any access to the government’s Financial Services Compensation Scheme, which may leave the investor with no access to compensation in the event that the borrower becomes insolvent.
  • Liquidity – due to the lack of any established secondary market for crowdfunded investments, investors may find it difficult, if not impossible, to cash-out their investment.
  • Start-ups – many borrowers on crowdfunding platforms are start-ups or businesses in the early stages of their development. There is a significant risk that the borrower business will fail, resulting in a capital loss to the investor.
  • Shares – it is unlikely that shares issued on crowdfunding platforms will carry any associated voting rights or rights to dividends for the investor. In addition, the value of any investment many be significantly diluted if more shares are issued.

Borrowers

  • Reputation – whether through lack of experience or time-pressures, borrowers may fail to achieve their proposed goals set out in their initial pitch. This may result in irreversible reputational damage to their business and the borrower’s public support.
  • Intellectual Property – in order to receive public backing, borrowers may find that they have to make a trade-off between producing a detailed and thorough initial pitch and exposing designs or products that have not yet been properly protected.
  • Management – successful crowdfunding campaigns may result in a borrower having to manage a large number of investor’s expectations, demands and investments. Without the appropriate resources, borrowers may struggle to successfully carry out this task.

Source: Lexology

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Rising wage growth means households can take rate hike, says BoE official

Households are ready to withstand interest rate hikes because Britain’s buoyant jobs market is boosting wage growth, according to a Bank of England official.

Dr Gertjan Vlieghe, a member of the Bank’s rate-setting Monetary Policy Committee (MPC), said a pick-up in wages and an increase in household debt meant the UK economy was “ready for somewhat higher interest rates”.

Speaking at a Resolution Foundation event in London, he said resurgent global growth was also laying the groundwork for a lift in the cost of borrowing.

He said: “The move from deleveraging to re-leveraging tells me that households are more willing to spend their marginal pound earned, which means debt is now less of a headwind to the economy, then it was previously.

“And that in turn means that the economy is ready for somewhat higher interest rates.

“Of course there are many other things going on in the economy than just moving from deleveraging to re-leveraging.

“First, there is the very significant improvement in the global economic outlook over the past 18 months, which has been unambiguously beneficial for the UK.

“The second is the Brexit-related headwinds to economy, which are pushing in the other direction.

“And the third is the increased evidence that tight labour markets are having some upward effect on wages.”

His comments come after the Bank moved to prepare borrowers for further and faster interest rate hikes last week in response to stronger-than-expected growth from the UK economy.

The move from deleveraging to re-leveraging tells me that households are more willing to spend their marginal pound earned, which means debt is now less of a headwind to the economy, then it was previously. And that in turn means that the economy is ready for somewhat higher interest rates

Gertjan Vlieghe

Bank Governor Mark Carney said on Thursday that rates would need to rise sooner and by more than expected at the time of the Bank’s last forecasts in November to get inflation back to target.

It leaves the door open to a potential rate hike as soon as May, with markets also now pencilling in more than three hikes within three years.

Dr Vlieghe said on Monday that the Bank’s decision on whether to lift rates or not would depend on the performance of the UK economy.

However, the more dovish member of the MPC, who has become increasingly hawkish in recent months, said low interest rates were not to blame for the surging costs within Britain’s housing market.

He said there were economies across the globe who have enforced low interest rates, but do not have the same housing market make-up as the UK.

Policymakers on the nine-strong MPC voted unanimously to leave rates unchanged at 0.5% last week.

Source: BT.com

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UK house prices show first annual decline in six years

The report published today by Acadata will no doubt prove to be interesting food for thought for property investors in the UK. For the first time in six years the annual increase in UK house prices has fallen into negative territory. In the 12 months to the end of January 2018 the value of the average UK home fell by 0.4% with London showing a fall of 4.3% in the final quarter of 2017. These are obviously worrying times for UK property investors but is it simply a consolidation of recent gains or the start of a significant downturn?

THE RECENT SLIDE CONTINUES

Since Brexit was announced there has been a significant slowdown in the growth of UK house prices. Indeed, while we are currently looking at house price depreciation of 0.4% over the last year it is worth noting that in August 2014, when the recovery was underway, annual house price growth came in at just over 10.6%. In more recent times we saw a peak of 5.65% growth in May 2017 which proved to be the start of a continuous slide. It will come as no surprise to those who follow the UK housing market that prices are under pressure but it is worth noting the significant increase in recent times.

MORTGAGE APPROVALS UNDER PRESSURE

These are potentially worrying times for UK property investors because despite the fact the UK government has introduced an array of financial assistance programs for first-time buyers, mortgage approvals fell to a near three-year low in December. It is difficult to gauge with any real confidence underlying demand for UK property at the moment. On one hand we have a significant reduction in the value of sterling over the last 18 months, which should play into the hands of overseas investors, while domestic demand is most certainly under pressure. Interestingly, while there has been significant reduction in the value of sterling against major currencies, the expected boost from overseas investment has fallen flat.

Similar to the US, many experts believe that the Bank of England will introduce at least two relatively small interest rate rises during 2018. A similar situation is forecast in the US with both the US and the UK looking to ensure inflation does not rise any further and put at risk the long-term recovery of their economies.

NEGATIVE PRESS COMMENT LEADS TO NEGATIVE SENTIMENT

There is no doubt that sentiment in the UK turned negative many months ago and there is also no doubt that the ongoing negative press comment will not help the situation. Whether areas such as the North of England, which have never really participated to any great extent in the UK housing boom, will outperform the rest of the UK on a relative basis remains to be seen. This is just one of many areas of the UK where attractive rental yields are available for those willing to do their research.

High single digit rental yields or even double-digit yields will to a certain extent support the capital value of the underlying assets. While in reality this would see a potential underperformance in relative terms when the UK market does recover, relatively high yields are extremely attractive in the current low interest rate environment. Could we see a significant switch between capital appreciation and rental income investment in the UK housing market?

Source: Property Forum

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The Bank of England is no longer messing around with subtlety

  • The Bank of England is making it very clear that it plans to hike interest rates more than once in 2018.
  • The bank’s communications have been unusually forthright in its last handful of announcements.
  • “Former Governor of the Bank of England, Mervyn King, once argued that a successful monetary policy should be ‘boring.’ On that criteria, the week’s developments suggest that the current MPC may not be doing too well,” Martin Beck, lead UK economist at Oxford Economics wrote.

LONDON — Listen up. Interest rate hikes are coming, and they’re coming at you fast.

That’s the message the Bank of England is delivering, and it is doing so in the clearest possible manner for a central bank.

Central bank communication is a famously nuanced and often obtuse art, with the change of a single word in a policy statement able to shift perceptions and move markets.

Now however, the Bank of England is practically shouting at the British people and the markets.

On Thursday, after holding rates in a unanimous vote of its Monetary Policy Committee, the Old Lady of Threadneedle said that policy could be “tightened somewhat earlier and by a somewhat greater extent over the forecast period” if the economy continues to grow as forecast.

“It will be likely be necessary to raise interest rates to a limited degree in a gradual process, but somewhat earlier and to a somewhat greater extent than what we had thought in November,” Governor Mark Carney then said in a press conference after the announcement.

For the average reader, those words likely seem fairly dry, and reasonably non-committal — but in the world of central bank-eze, that’s as clear as it gets.

“Former Governor of the Bank of England Mervyn King once argued that a successful monetary policy should be “boring”. On that criteria, the week’s developments suggest that the current MPC may not be doing too well,” Martin Beck, lead UK economist at Oxford Economics wrote on Friday, summarising the unusually vocal approach the Bank of England is taking to its policy.

“The publication of a surprisingly hawkish Inflation Report led the markets and ourselves to significantly reappraise the future path of Bank Rate.”

The Bank made it even clearer it isn’t bluffing when on Friday, Ben Broadbent — deputy governor for monetary policy, and Carney’s effective number two — gave an interview to the BBC’s Wake Up To Money.

Broadbent, who is one of the BoE’s best communicators, was pretty much as unequivocal as a policymaker can be in public about the future path of interest rates, saying that should rates rise to 1% by the end of 2018, it would “hardly be a terribly big rise.”

“We don’t make promises about future interest rates,” Broadbent was at pains to say, before effectively doing the opposite.

“There’s nothing terribly dramatic going on here. The MPC said that they thought it likely that any rate rises required over the next two to three years would be limited and gradual. We wanted to emphasise that point yesterday. Yes, the path looks slightly higher, and rate rises may come a little bit sooner than expected in November.”

“We do not fix the path of interest rates in advance. What is fixed is our remit, and rates change with the economy. Let’s be clear, doubling of interest rates from 0.5% is hardly a terribly big rise.”

“There’s a reason they’re low, there’s all sorts of long term reasons as to why globally the level of interest rates required to keep inflation stable has been much lower than in the past,” he continued.

“But nor do I think if there were to be a couple of 25 basis point rises in a year, that that would somehow be a great shock.”

The bank’s aggressive communication strategy appears to be doing the trick. Markets are now pricing a hike in May, the next time the quarterly Inflation Report is released — with BNP Paribas suggesting at least a 75% chance of a hike.

By August, the probability is now seen as 100%, according to market expectations.

The bank generally only changes policy on the day of an Inflation Report, as Governor Carney holds a press conference on those days, giving the bank a greater ability to communicate its reasoning behind decisions to the markets and wider public.

“Our expectation that the MPC will go for a further 25 basis points rise in Bank Rate in May has been reinforced and we now expect a second hike in 2018 in November.”

Source: Business Insider