September 25, 2023 - 7:00am
Word on Wall Street is that interest rate hikes by central banks across the world are coming to an end. With inflation falling in most developed countries and global growth slowing, traders and analysts in financial markets are taking a breather.
After the Bank of England announced that it would keep rates on hold last week, hedge funds have rushed to unwind their short bet against British gilts — indicating that they think interest rates aren’t going any higher.
It is certainly possible that rate hikes may be finished. But while inflation is currently falling in most developed countries, there is every chance that it may still persist in the face of rising energy prices.
Saudi Arabia and Russia have indicated that they want to push global oil prices to $100, with the Brent oil price in Europe up nearly 31% over the last few months. These energy price increases are already noticeable in the motor oil inflation numbers in August, and it seems likely that they will become more pronounced in the coming weeks.
Even if energy prices do not cause inflation, it is far too early for central banks to take a victory lap. If history teaches us anything, it is that during interest rate hiking cycles, policymakers always talk up the prospect of a “soft landing” where prices stop rising and economic growth continues. But they almost never deliver on these promises.
The potential for a soft landing seems particularly unlikely this time around. This is because central banks are committing to maintaining higher interest rates for the next year or two. That means that mortgage rates will remain high and the housing market will get squeezed tightly, even if rates don’t go any higher — which they might. House prices are already falling in most developed countries, and housing starts have begun to decline.
Present house price valuations are simply not viable with interest rates at these levels. Relatedly, would-be borrowers cannot afford repayments. So, if the mortgage rates are going to stay high, it is the house prices that will have to adjust — and that is precisely what we are already seeing.
Housing market bulls have been hoping that inflation would fall rapidly and that central banks would respond by dropping rates back down to zero. But central banks are clearly signalling that this is not going to happen. It now seems all but inevitable that housing valuations will have to adjust to return the market to equilibrium. Expect some overshoot too, because when housing markets adjust, they tend to adjust chaotically as the speculators in the market are shaken out.
The last time the Bank of England started a rate hiking cycle was in August 2006. Interest rates peaked a year later in July 2007. The recession did not set in, and unemployment did not start rising until May 2008 — just one month after the beginning of annual declines in house prices. This clearly shows the lagged nature of the impact of rising interest rates on the economy.
Of course, every cycle is different. House prices in Britain have declined for seven consecutive months. The annual decline in August was 5.3%, a fall last seen in June 2008 when the economy was haemorrhaging jobs. As the traders celebrate the fall in inflation and the hedge funds stop shorting British Government debt, a look at past trends reveals trouble ahead.
Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics
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SubscribeIf the population was stable, then all this theory holds. However, when you increase demand via importing millions of potential customers (for an effectively finite commodity) every decade, then reality interferes. It’s a shame so many authors omit this in their pieces.
The impact of migration on housing complex and variable. In some places it does add a pressure, in others it revitalises an area.
However pre 2010 we were building 39-40k of social housing p.a. Been c7k since then – (Govt’s own data). Lack of decent social housing big contributor to spiralling costs and mortgage exposure, as well of course inability to have a home of one’s own.
Another big trend creating additional pressure is the growth in single person households – now almost 4 in 10. Some reflective of aging population and some other social change. Were we not subject to these trends we’d be closer to equilibrium but academic as neither trend will reverse anytime soon.
Easier to blame/scapegoat immigrants though.
You keep on spouting this specious nonsense. Very few people are scapegoating migrants, importing over 7 million people over 25 years and keeping interest rates low over a ridiculously long period has had a material impact on housing.
Well I guess some progress AR in that at least you’ve added the impact of low rates and implied QE – which has benefitted Asset Holding Britain rather than Austerity Experiencing Britain. But you’ll note the point to which i was responding only mentioned immigration.
As we do fairly often, we debate what might be appropriate migration levels given our non replacing birth rate and aging population quite a bit and I’m sure will continue. I agree net 600K too high as been the recent case. We’ve taken back control though haven’t we?
Liar, it’s impossible to have any kind of honest debate with you. I’ve mentioned low interest rates (aligned with QE) on almost every occasion. I’ve never mentioned “taking back control” either.
Perhaps you like to explain how immigrants never grow old, or maybe accept that they do and they too might be living in single occupancy households.
Paying employees a decent wage might help declining birth rates (not relying on low interest rates or tax credits), not creating part time/zero hour contract jobs, offering incentives regarding flexible working such as affordable nurseries and maternity/paternity leave tailored to the size and nature of the business involved. Incentives for people to create their own buisness (no punitive business rates/taxes or over zealous bureaucracy)
What sort of population do you think Britain can adequately sustain 70 million, 80 million… before there is social, environmental and economic collapse.
But one reason why strong betting now on a spring UK General Election. Tories can see a wave of mortgage increases through 24 as folks come off fixed rate deals, alongside a number of new owners having devalued properties. If they wait til Autumn 24 those encountering this reality will just be higher.
(Tories will also bank on a couple of air lifts to Rwanda and winter weather not conducent to Boat crossing to claim they’ve arrested that issue too. They can’t risk summer 24 showing it’s made v little difference. So all bets now on Spring GE)
To be clear – are you saying that you think near-0% interest rates and property hyperinflation are good things?
I don’t really understand your point here. Starmer himself has, correctly in my view, said clearly that house prices need to fall relative to incomes (admittedly he didn’t say how that should happen). Zero % interest rates are a prime example of how, when politicians are given new toys the toy has a habit of never going back in the box.
Granted: As chancellor Sunak didn’t seem overkeen on restraining the property market and it is very right he is challenged on that.
But I don’t really understand what you think is the divergence on interest rates between Labour and Conservative. There is I think a wider question about the wisdom or otherwise of independent central banks.
Similarly Keir Starmer has also said quite clearly that he thinks immigration is too high. Indeed it is interesting to see how little kickback he got from inside the Labour Party when he said it. Sure, there are arguments to be had about how to handle it – but there’s not much disagreement between Sunak and Starmer.
What I would add to the article is that property prices are certainly falling, but they are falling from extraordinarily high levels during the period when the state wet itself over covid. Whilst that might not make for a soft landing I suspect that a lot of people were aware that prices were likely to fall. Of course there is the perennial question about how far people should know for themselves that prices can and do go down as well as up.
Think you got a bit over-excited there SH as all I outlined was the predicted interest rate position one reason Tories will go to the Polls next Spring. Slam-dunked as a prediction IMO by the small window Tories have to contend they are beginning to get a grip on the Boats.
Separately I think a market re-set on interest rates long overdue and inevitable. The difficultly is Tories have made it worse than it could have been and a right mess of the Housing market last 14yrs to boot. Starmer will build more (if he gets in), but no quick solutions.
It was the idiots at the central banks – especially the “independent ” BOE – that made the QE mess, not the government.