The UK economy sags under the weight of higher borrowing costs

Making sense of the latest trends in property and economics from around the globe
Written By:
Liam Bailey, Knight Frank
4 minutes to read

To receive this regular update straight to your inbox every Monday, Wednesday and Friday, subscribe here.

Inflation data published on Wednesday muddied the waters for mortgage rates.

The five-year swap rate was trading above 5.4% on Friday after starting the week below 5.2% (see chart). Not a huge move but it could be enough to slow or pause the flow of mortgage rate cuts that has been gathering steam during the past five weeks.

Tom Bill has more detail in his piece this morning. Lenders are still under pressure to do business in a low volume market, which offers a big incentive to keep margins thin and transactions ticking over. Mortgage approvals for the purchase of homes are running a fifth below the five-year average (excluding 2020). The bigger high street lenders are also less reactive to short term swings in the swaps market.

Several large lenders announced rate cuts at the start of last week before things went quiet on Thursday and Friday. We'll have a better idea of how mortgage rates are likely to progress in the short term by the end of this week.

Asking prices

Surveyors that responded to the latest RICS Residential Market Survey said that buyers were increasingly putting in offers that sellers were unwilling to accept - you can find comments at the back of the report.

The mismatch will weigh on transactions in the short-term, which is one of several factors limiting house price falls. Other factors include the shock-absorber effect of strong wage growth, lockdown savings, the availability of longer mortgage terms, flexibility from lenders and the popularity of fixed-rate mortgage deals.

The gap between what buyers want and what sellers are prepared to pay will narrow as the era of higher mortgage rates feeds into the public consciousness. There are signs this may already be happening, according to figures from Rightmove out this morning. The average asking price of new listings fell 1.9% this month, the largest fall since August 2018.

The fall is at least partly due to the usual summer slowdown, but the company did point to evidence of sellers pricing more competitively in the face of high mortgage rates.

Feeding through

Evidence is growing that higher borrowing costs are being felt right across the economy.

A disappointing set of retail figures for the month of July constituted "a big wobble", writes Stephen Springham. While the annual rise of +4.4% is solid in an economy that is stagnating, that is the weakest reading since January. Volumes excluding fuel also shrank 3.4% on an annual basis.

Meanwhile, the majority of businesses responding to the latest Lloyds Business Barometer reported the weakest output levels in eight months.

"Output in the private sector is only marginally expanding, and it’s clear that many businesses are downgrading their expectations for future output growth as they settle in for what they believe will be a period of price pressures that are stronger than hoped and may last for longer than previously anticipated,” Nikesh Sawjani, senior UK economist at Lloyds Bank, tells the Times this morning.

Global interest rates

The annual rate of inflation in the Eurozone dipped to 5.3% during the year to June, down from 5.5% the previous month, according to figures released on Friday. The annual rate has fallen by roughly half over the last nine months, but as we're seeing in the UK, core prices remain largely flat and services prices are still accelerating, underpinned by strong wage growth.

This is the backdrop for the annual meeting of central bankers due to take place at Jackson Hole this week. The global picture for inflation was at crisis point this time last year, and is now more of a headache. Uncertainty reigns over how long it will take central banks to cross the final percentage points back to 2% targets, alongside how much economic pain they'll have to inflict along the way.

Long term borrowing costs in both the US and the UK have risen in the most recent seven days, underpinned by expectations that both central banks have more to do to tackle inflation. Federal Reserve minutes published on Wednesday said there was now “significant upside risk to inflation, which could require further tightening of monetary policy”.

In other news...

Christine Li explains why China's debt crisis "has the potential to defer any revival in both the real estate market and the larger Chinese economy, where real estate holds a pivotal position."

Mark Topliff covers new research on the economic impacts of rural connectivity.

Elsewhere - Tourism at inflationary hotspots tests ECB (FT), spiralling rents add to Barcelona’s housing struggle (FT), and finally, NYC kicks off plan to rezone Midtown, turn offices to houses (Bloomberg).