Happy New Year, everyone, and welcome to the inaugural blog 2024. In this week's initial offerings, we are crisscrossing the narratives of the financial press, looking at the trends that are already emerging, and trying to pick out what most affects our corner of the industry.
On the first tentative peruse, house prices have risen for a third month in a row, mortgage rates are down as the scramble to commercially reposition begins on the high street, and media commentators are indicating the output of the UK construction industry is finally slowing in its fall. One of the great tropes of financial commentary is the celebration of velocity; floating toward the ground is always preferential to plummeting, so things are looking up with that metric in mind.
Starting with house prices as a particular relevance to our asset class, the situation is very much playing out as we predicted it would 12 months ago; a lack of supply is supporting UK house prices, which have risen for a third consecutive month in December according to the Guardian Newspaper reporting on the latest round of Halifax data released. According to the Halifax release, property prices grew 1.1% in December, after a 0.6% rise in November and a 1.2% increase in October. As the article also references, the number of fixed-rate deals in the market coming to an end will play a significant role in what happens in 2024, with Goldman Sachs analysts estimating a 19bil increase in mortgage costs this year alone, which could theoretically counterbalance any unit value appreciation brought in from new entrants to the market.
One thing that is for sure is the battle for market share in the mortgage markets coming out of this hawkish era of central banking has begun; the millions coming out of fixed-rate deals must go somewhere, and depending on how competitive this gets, that could significantly stimulate the buy side, the market our clients are essentially selling into. Quoting Moneyfacts, the average rate on a two-year fixed mortgage has fallen to a low of 5.87%, with almost all the high-street banks announcing cuts and changes to the metrics as the swaps rates soften, institutions want to taper down their offerings slowly to maximise their profits on the way down but don't underestimate a race to the bottom for market share significantly speeding up that process. Looking at the swap rates, the numeric tarot cards entrusted to predict future economic confidence, Mr market now finally believes that central rates have peaked; the 5-year swap has fallen to a 3.4% low, almost 1% lower than where it was in Q4, which would suggest the top is in for now.
Another interesting point picked up by the Financial Times is that with this now being an election year likely, and given the millions who have faced mortgage anguish in the past few years, could political pressure create a downward effect on rates? In our experience, this is not likely because that scenario would be lenders frontrunning the central bank decisions entirely on the gamble that rates will come down. If a macroeconomic event changes the direction of travel, they would be left twisting in the wind. The likely outcome will be following the Bank's lead; it's essentially how the mechanics of the money markets are set up, and the Bank of England has remained independent since 1998 for this very scenario to divorce itself from political pressure in times of crisis.
Finally, looking at construction, the good news is that after a torrid couple of years, we are finally seeing some green shoots through the industrial slurry. Construction was one of the only sectors of the UK economy experiencing growth by the latter quarter of 2023, and cost pressures, including construction materials, have begun to flatten. Industry researchers at Insight Retail Group stated that the period between June and August 2023 saw an average drop of 1.6% in the cost of raw materials compared to the previous year. This trend will likely continue into 2024, providing significant relief to the SME development market, which is looking for confidence heading into its next multi-year cycle of projects.
If you are one of our fantastic clients and partners, we wish you the best in 2024, and you will hear from us very soon. Our team has had an incredibly busy start back discussing what we can offer your residential development clients, and with a whole suite of products on offer now to assist, it's set to be an exciting year.
Our Development Finance clients can benefit from facilities up to 70% LTGDV (Up to 85% LTC) from 5.30% plus the cost of borrowing.
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