Another Bout of Mortgage Volatility Tees up a Big Week for the Bank of England

Posted by Knight Frank Newcastle on 15th June 2023 -

Prime rents

The post-pandemic recovery in city economies that began in late-2021 triggered an unprecedented period of rental growth for prime homes.

Lockdowns disrupted construction, putting pressure on new supply. Meanwhile, landlords were lured to part with homes amid strong demand in the sales market. Cities reopened and workers returned, adding a sharp uptick in demand for a depleted supply of rental properties.

We're seeing signs of easing, but not much (see chart). The Knight Frank Prime Global Rental Index, out this morning, rose 8.5% in the 12 months to March this year, slipping back from the 10.2% recorded the previous quarter. Rents hit record highs in eight of our 10 markets and the index now stands 21.7% above the pandemic low of Q1 2021.

Singapore leads with rental growth of 31.5% over the past 12 months. International workers flooded back to the city following the reopening of borders in late 2022 and successive hikes in stamp duty rates have raised the cost of property purchases, nudging potential buyers into renting. London follows with growth of 16.9%. Sydney, Toronto and New York also recorded double digit growth.

How governments will react to higher rental costs remains the key question for investors. Rent caps seem to be off the table in most markets for now, and policy focus is shifting to encouraging a surge in new build- to-rent accommodation.

Volatility

Official figures published last month showed that the annual rate of inflation during the year to April had fallen by less than economists had expected. The core rate of inflation actually accelerated to the highest level since the early nineties.

It was an ugly surprise. The subsequent spike in gilt yields prompted a wave of volatility in mortgage markets, with lenders pulling entire ranges amid a surge in applications from borrowers seeking to beat rate hikes. Markets are skittish, and earnings data published yesterday generated another big reaction. Two-year gilt yields surged 0.25% points to 4.87%, the highest level since 2008. The five-year swap rate moved above 5%, raising the likelihood of further increases in mortgage rates.

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