Rates

At the point of writing, the news headlines indicate that UK wages have risen at their fastest rate in 20 years as British workers continue to battle for a fairer pay deal. On the surface, this may seem like great news, but unfortunately, it's a further headache for the Bank of England in its efforts to bring wage inflation in line with CPI inflation. As it stands, in Q1, regular pay excluding people on commission and bonus-driven remuneration grew by 7.2%, which may be a strong indicator of further rate rises. In this week's blog, we look at why the Bank of England think like that, the pros, and cons of their strategy, and what that means for borrowers in this climate. We also explore our solution and what Invest & Fund offers their clients regarding a capped rate facility.

The Bank of England subscribes to the Keynesian economic theory that rising labour or an increased number of jobs - essentially bids up wages, creating a demand-pull inflation mechanic, i.e., more money chasing what becomes fewer goods. This action drives the prices up in the short term. The problem is that the existing job market is under considerable pressure to provide pay increases to sustain living standards to where they were previously, and the second they do, inflation starts to go up. Confusing, isn't it? So, we are looking for a cooling labour market leading to long-term growth, completely contradictory ideas that somehow must balance.

The real problem for the Bank of England is they need more options for tackling this; they have one weapon, and unfortunately, it's the nuclear missile option of central bank rate manipulation. Fiscal policy, i.e., the government's plan on taxation and spending, is essential for the functioning of the economy, but when the problem is the confidence of the global market in that fiscal policy, the buck stops with the Bank of England and their monetary policy. If anything, the pressure is on from the government for them to react, as inertia is seen as politically unpalatable. Hence, the temptation to press the launch button on rates to put entrenched inflation down at all costs is always there, and some would argue, too aggressively pushed as a solution.

This extreme monetary policy reaction has consequences, some of which we now see in the residential mortgage market. At the start of the year, there was still a comfortable buffer between the central bank rate and the visible pricing, and that's because the price of mortgage-backed securities primarily drives the cost of mortgages, and it took a while for investors to make their minds up on how successful the inflation battle would be. It's a popular misconception that the central rate is tied to pricing when it's one of many factors, for instance when the prices of mortgage-backed securities drop, mortgage providers tend to increase interest rates, so in this instance, the level of inflation devaluing the pound and dollar has reduced the investor demand for mortgage-backed structured products globally to a 23-year low, and that's why mortgage rates are increasing, to try and increase the attractiveness of the returns. For those of us who monitor the markets, we saw this coming as far back as Q4 2022, but the hope was that inflation would come down faster.

Regarding asset pricing, we can be more optimistic in the residential housing market, and even dare I say it, given the doom and gloom nature of the above - optimistic! We made our judgement calls last year, and we still stand by what we said; the critical data will be the ONS report due out on the 21st of June, which we will cover later in the month. Looking at a recent article in The Economist, they state that "globally house prices have started to turn around", with Australia, America and the Eurozone all seeing rising values, which may be a forward indicator of how our market will react eventually, certainly if our thesis is correct that despite mortgage market issues, the levels of private wealth on the demand side will bid up a market plagued by multi-generational supply issues. It's important to state here we are talking about a minor retracement to temper expectations, as opposed to the much media-speculated "cliff edge" price scenario.

What can we offer our residential development clients to manage their way through this? As of the last round of inflation figures, the general market consensus is that the cost of borrowing will increase; that's already visible to people actively in the market, so to try and counter that, we offer both standard and capped rate product lines. When structuring a deal with your clients, this allows us to lock in the costs as best we can to protect your clients from shouldering additional costs in Q3 and Q4 when it's looking more & more likely that will be the case.

Our Development Finance clients can benefit from facilities up to 70% LTGDV (Up to 85% LTC) from 5.30% plus the cost of borrowing.

For a full criteria breakdown, please email us at borrowing@investandfund.com or call us on 01424 717564.