At the time of writing, we have just had the final round of inflation figures out for 2023, so unpacking those and their potential impact on fiscal and monetary decision-making in 2024 will be our first port of call in what will be our final blog of the year before we have a quick roundup of what we feel we will see in 2024.
The CPI numbers for November have tumbled hard to 3.9%, which makes excellent press copy, but looking closely at the core inflation data, it's still over 5%, so the critical thing here is caution. Financial markets have seemingly factored in Q1 rate cuts, with the FTSE 100 index hitting a 90-day high, and the April/May MPC meetings will be the ones to watch here to see if a combination of expectation and political pressure will influence the vote. It's also important to think about the fact that rates aren't the only lever being pulled here; a policy of Quantitative Tightening, removing billions from the overall supply by selling off tranches of government bonds, has also been deployed to get hold of inflation, and this action in itself pushes up rates.
Bond yields have fallen sharply as the market has gambled on interest rate falls, with the 10-year UK Bond yield dropping to its lowest level since April, and this will only add to speculation in the press to guess an MPC decision in Q1, the press watches the smart money, the same way gamblers at the track monitor the chalkboards, trying to get a steer on who has the inside track.
The concern will be coming down too fast, and the conditions in early 2024 will be ripe for an explosion of retail and business borrowing in almost all forms, which could be counterproductive regarding quelling inflation. A steep and rapid rate decline could also create a liquidity trap situation where the debt markets suddenly become less attractive, and we see a move to cash and other strategies at a time when we need a lot of national-level borrowing to refinance large swathes of the economy, stimulate business growth, and boost housing, so like everything in life, this will come down to balance. The base rate situation could be considered a giant game of What's the time, Mr Wolf? The creep back towards a manageable 2% level of inflation must be gradual enough and quiet enough to avoid getting spotted or eaten by the bond market.
Given the challenges in homebuilding, what could be the positive outcomes in 2024 due to these market expectations? Let's look at the top three and call it our predictions for 2024. Rates. The overall cost of borrowing for the alternative lending market in 2024 will likely come down. Even if the reduction is nominal, shy of a significant global macro event, the top was potentially Q3 2023. This releases a considerable number of businesses and borrowers waiting on the sidelines to enter the market, from businesses waiting to refinance to people looking to acquire land at a market low, from people looking to borrow over a multi-year phased timeline, the confidence needed to do that in a rapidly rising rate environment was substantial. What we will see, and perhaps this is prediction number one for the broader development market, is a switch from the dominance of financial applications of necessity and restructuring to applications of speculation and growth, and that's healthy for everyone involved in this market and the needs of the economy as a whole.
Our second prediction for 2024, especially given the nature of the climate in what could likely be an election year, will be an increase in support for the development sector regarding the mechanics of launching projects. We are already seeing more authoritarian rhetoric from Michael Gove that talks of stripping councils of their planning powers and forcing through developments at a state level. The pros and cons of this sort of interventionist policymaking could be unpacked in a blog of its own, but the critical takeaway is that actions will become bolder. We fully expect a lot of the red tape that's had a substantial and costly impact, particularly on the SME sector serviced by the alternative finance sector, to begin to fall away.
Our final prediction for 2024, which we have touched on in previous pieces, is that the volume of private sector and institutional investment into homebuilding will skyrocket in 2024. This is to take advantage of one of the modern age's most interesting asymmetric investment opportunities. As rates come down and fire the starting gun on an era of intensive homebuilding in the UK, fully backed and supported on a state level out of sheer necessity, the opportunity for the custodians of significant wealth to bolster their returns is vast. How much of that will be filtered through the conduit of p2p remains to be seen, but looking at the market cap of this sector and its growth trajectory over what we may look back on as the "leaner years", the upside coming out on the other side is incredibly bullish.
That is a wrap for 2023, folks; we will return with exciting announcements alongside our usual hot take on the market in the new year.
We wish you all a safe and Happy Christmas and a wonderful New Year.
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