Tag: Interest Rates

Federal Reserve Holds its Benchmark Interest Rate

On June 12th, 2024, the FOMC (Federal Open Market Committee) for the seventh straight meeting, once again held its benchmark interest rate steady at 5.25% – 5.5%, which is the highest level it’s been for over twenty years. Whilst Chairman Powell dialled back expectations for rate cuts this year saying the latest forecasts were a new conservative approach, financial markets suggest that there may be two rate cuts this year with the first cut possibly coming in September. However, policymakers have advised that instead of three rate cuts in 2024 as previously advised, they now only expect to make one rate cut in 2024. 

On the same day before the FOMC meeting CPI (consumer price index) figures were published, reflecting better than expected data which is cause for optimism in the future. Chairman Powell was quoted as saying the “numbers are encouraging” and suggested that the latest CPI figures may not have been fully taken into account by the latest quarterly projections. He went on to say that although the committee were briefed on the CPI figures, most individuals do not update projections when data arrives in the middle of policy meetings. His words were jumped on by many leading experts who suggested that the door is still wide open for two rate cuts in 2024. 

Officials of the Federal Reserve raised their outlook for inflation in the longer term to 2.8%, up 0.2% from their March 2024 estimation and still above their target of 2%. However, experts suggest the Federal Reserve is still trying to come to terms as to the appropriate time to cut interest rates, as there is uncertainty regarding tight monetary policy and the impact it is having on the economy. Despite high borrowing costs, consumer spending and job growth have been particularly resilient even though inflation remains above 2%. Chairman Powell has been quick to point out the split within the committee where the “Dot Plot”* showed eight officials expecting 2 rate cuts, seven expecting one rate cut and four expecting zero rate cuts.

*Dot Plot – This is a graphical display consisting of data points on a graph which the Federal Reserve uses to predict interest rates. The graphs display quantitative variables where each dot represents a value.

Experts suggest that chairman Powell is content to leave interest rates unchanged until the economy sends a clear signal such as a jump in the unemployment rate or further declines in the CPI. However, with the Federal Reserve’s eyes on the PCE index (Personal Consumption Index), nothing is really as it seems.

 European Central Bank Finally Cuts Interest Rates

On June 6th 2024 the ECB (European Central Bank) announced a cut in interest rates of 25 basis points to the deposit rate lowering it from 4.00% to 3.75% as headline inflation is now just above its 2% target having fallen from 10% in 2022. Inflation has largely come down due to lower fuel costs and supply chains, which have now become normalised after a few post Covid-19 twists and turns. 

However, the ECB advised that inflation is not yet beaten as the service sector remains sticky and as a result the ECB announced that “despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year.” The decision to lower interest rates was nearly unanimous with the only negative vote coming from Robert Holzman, Governor of the Central Bank of Austria.

The President of the ECB Christine Lagarde hedged her bets when answering questions regarding future rate cuts. She is quoted as saying “ Are we moving into a dialling back phase? I would not volunteer that. Is the dialling back process underway? There’s a strong likelihood”. A number of experts have described her message as somewhat confusing, especially as she added “We are not pre-committing to a particular rate path”. Experts and analysts alike suggest that another rate cut in July is now unlikely, with financial markets now focusing on September 2024. 

Last month the President Lagarde declared inflation under control, however with the lack of a clear path on rate cuts being offered by the ECB the string of recent data has pointed the finger at enduring price pressures. This alone would suggest that the ECB is going to be, as with other central banks, data driven prompting cautions when talking about future interest rate cuts. Together with a quarterly outlook published by the ECB forecasts for inflation will average 2.2% for 2025 up from an earlier forecast of 2%.

Elsewhere the Bank of Canada reduced its benchmark interest rate but both the Federal Reserve and the Bank of England are fighting tougher price pressures, and are only expected to follow suit in the coming months. Financial markets are waiting for some clear signs from both the Bank of England and the Federal Reserve as to when they expect to cut rates.

The Financial Markets Got It Wrong Predicting a US Dollar Decline in 2024

As 2024 started many investors, experts and analysts predicted that the US Dollar would decline. However, the greenback, thanks to a very hot US economy, and an inflation problem ensuring the Federal Reserve will not cut interest rates for the time being, means a strong dollar has returned and does not look like it is going away. Furthermore the IMF (International Monetary Fund) has predicted that growth in the United States will grow at a rate of two times that of the remaining members of the Group of Seven, and with geopolitical tensions at a height not seen for decades, the US Dollar is still viewed as the ultimate safe haven.

Many economists and other analysts are predicting that the US Dollar will continue to grow, with one well-known bank suggesting the dollar will continue to increase in value through 2025. The resurgence of the dollar has come on the back of many financial signals pointing to the US economy sidestepping a much anticipated slowdown, with manufacturing continuing to grow and the labour market remaining tight, plus as already mentioned, the forecast of interest rate cuts being put back due to inflationary problems. 

The financial markets have scaled back their bets on an early cut in US interest rates which has resulted in soaring benchmark treasury yields hitting a figure of nearly 5% which has been a major factor in the US Dollar’s appeal. The dollar has also been further driven by the demand for AI (Artificial Intelligence) resulting in massive inflows into the relevant US Stocks. One senior asset manager has been quoted as saying “The dollar is such a high yielder, if you are a global allocator and running your portfolio, what a slam dunk to improve your risk-adjusted returns: buy shorter-term US debt, unhedged.

The US Dollar during times of financial and or political instability is still recognised as the ultimate investor sanctuary, and as such with the current geopolitical turmoil investors have been seeking refuge in the greenback. This was proved last Friday 19th April, where there was a surge of US Dollar buying following Israel’s retaliatory strike on Iran. Indeed, experts suggest that whilst there has been a surge in US Dollars due to geopolitical risks, its strength will probably last well beyond the current conflict. Analysts also advise that high treasury yields coupled with American energy independence will more than likely continue to retain the greenbacks appeal to the financial markets and investors alike.

Bank of England Interest Rates. Will They or Won’t They?

This month on June 20th the Bank of England’s MPC (Monetary Policy Committee) will meet and decide whether or not to keep interest rates on hold. At the last meeting of the MPC in May, interest rates were held at 5.25% for the sixth consecutive month and are still at their highest level since the Global Financial Crisis 2007 – 2009. The Bank of England’s target figure for inflation is 2% and in April it dipped to 2.3% which is a significant difference to March’s figure of 3.2%. 

However, experts in the financial markets had expected CPI (Consumer Price Index a common measure for headline inflation) for April to come in at 2.1%. However an important element in core inflation (does not include figures from food and energy sectors) came in at 5.9% in April down only 0.1% from March. All the above figures are supplied by the ONS (Office of National Statistics).

At the May meeting of the MPC Governor Andrew Bailey indicated that June may see a cut in interest rates though it is not a “fait accompli”, whilst also advising that like other central banks any cut in interest rates will be data driven. In mid-May financial markets suggested that an interest rate cut in June was circa 60% as measured by the overnight index swaps*, but since the release of the April inflation figures in late May that suggestion of an interest rate cut has subsided mainly in part due to sticky service inflation figures.

*Overnight Index Swaps – This is a financial bet on the direction of short-term interest rates and is a type of interest rate swap. In this case, it is typically a fixed for floating swap, where one party pays a fixed rate and receives the floating rate (linked to an overnight index) while the other party does the opposite. The overnight index for sterling is known as Sonia (replaced sterling Libor) and stands for Sterling Overnight Index Average.So will the Bank of England cut interest rates on June 20th? A number of experts suggest that an interest rate cut may not happen as the services sector inflation remains a problem and came in a lot hotter than market analysts predicted. Many experts feel that services inflation remains a critical part of the Bank of England’s thinking regarding inflation and interest rate cuts, and therefore the MPC may well decide to once again hold rates on June 20th.

United Kingdom Interest Rates: May 2024

Interest rates reached 5.25% in August 2023 and have held steady ever since.

Once again on 9th May 2024, the MPC (Monetary Policy Committee of the Bank of England, BOE), held rates steady at 5.25%. A number of experts and analysts felt that the Bank of England would cut interest rates this time around, but data showed that inflation was stickier than otherwise predicted. A rate cut is still expected this year, but the timing may have just been kicked slightly down the road. Interestingly, the Deputy Governor of the  Bank of England along with external member Swati Dhingra voted for an immediate cut in a 7 – 2 split favouring keeping interest rates steady

However, the Governor of the Bank of England, Andrew Bailey, has given the clearest hint yet that interest rates may soon be cut by indicating that he feels the financial markets have under-priced the pace of easing in the coming months. The governor further advised that before the next meeting on June 6th, there are two rounds of data regarding inflation and wages which will be highly important regarding any rate cut. Governor Bailey went on to say, “It’s likely that we will need to cut bank rates over the coming quarters and make monetary policy somewhat less restrictive over the forecast period, possibly more so than currently priced into market rates”. 

Whilst the governor was not actually confirming that 6th June will see an interest cut saying that date is “neither ruled out or a fait accompli’, this is the first time he has addressed investors/financial markets directly regarding expectations on future interest rate cuts. After the governor’s comments, traders priced in a 25 basis point as 50/50 in June but have fully priced in a cut in interest rates in August. The markets are now suggesting that there will be 59 basis points cut in 2024 as opposed to early suggestions of 54 basis points.

By the end of the second quarter, officials in the Bank of England feel inflation will be down to 2% (Bank of England target) due mainly to lower energy bills. These officials have further advised that they expect inflation to rise slightly throughout Q3 and Q4 but at a gentler pace than previously expected, though they warned geopolitical factors might negatively impact inflation. Interestingly, a number of experts and economists have advised that inflation may well fall below the target figure of 2% by the end of Q2, forcing the Bank of England into cutting interest rates.

Interest Rates Remain Unchanged in Europe, America, and the United Kingdom

The European Central Bank

On the 7th of March 2024 the European Central Bank (ECB) kept interest rates on hold for the fourth meeting in succession, the deposit rate of 4% remaining unchanged. The consensus coming out of the Governing Council is that keeping borrowing costs unchanged for a sufficiently long period means that their target inflation number of 2% will be more easily accessible. Indeed, the President of the ECB Christine Lagarde advised that inflation is definitely slowing down but remains sceptical of lowering interest rates at this time. 

President Lagarde went on to say that further data in the coming months, especially by June, should give the ECB a clearer picture regarding a drop in interest rates. Like the Bank of England and the Federal Reserve, the ECB is considering when to announce that inflation is beaten and start the process of unwinding their unprecedented monetary tightening policy. However, like their peers the Federal Reserve and the Bank of England and despite Presidents Lagarde’s coyness on a June 2024 interest rate cut, the indications from the ECB are that a June interest rate cut is in the offing, and as a result money markets are indicating three/four interest rate cuts by the end of the 2024.

The Federal Reserve

On the 20th of March 2024 the Federal Reserve’s FOMC (Federal Open Market Committee) announced that they are holding the benchmark federal funds rate steady at 5.25% to 5.50% for the fifth consecutive meeting. However, officials signalled that they remain confident that rates will be cut in 2024 for the first time since March 2020 and they also revised downward their December 2023 forecast of four interest rate reductions in 2025 to three interest rate reductions. Whilst the Federal Reserve has seen inflation fall from a high of 9.1% in July 2022, the figure sadly ticked up slightly in February 2024 due to the cost of clothes, car insurance, airline fares, gas, rent and shelters. 

Post-meeting statements/comments were nearly identical to those made at the post meeting interviews in January 2024, being that rate cuts will not be made until the Federal Reserve is more confident that inflation is moving towards the 2% target. Experts have predicted that interest rate will be cut three times this year but there are doubts as recent data shows inflation is slowing and remains at 3.2%, meanwhile financial analysts and traders are betting that the first interest rate cut will be announced this June. Chairman Jerome Powell reiterated his vow to keep interest rate elevated as the fight against inflation continues. 

The Bank of England

The Bank of England’s MPC (Monetary Policy Committee) on the 21st of March 2024, maintained Bank Rate at 5.25% by a majority vote of 8 to 1 as official data released showed that inflation had receded to 3.4%, its lowest level in over two years. However, whilst headline inflation has been receding rapidly, the Bank of England is very aware of prices in the service sector and wages where price growth is still in excess of 6%. The Governor of the Bank of England Andrew Bailey was quoted as saying “Britain’s economy is moving  towards the point where the Bank of England can start cutting interest rates”. Interestingly within the 8 to 1 majority and for the first time since September 2021 none of the MPC members voted for a rate hike, and two hawks (Jonathon Haskel and Catherine Mann) became part of the no-change majority with Swati Dhingra being the one vote for a cut in interest rates. 

When asked the question ‘Were investors correct to price-in two to three rate cuts in 2024?’, Andrew Bailey replied “It is reasonable for markets to take that view”, while stressing that he would not confirm or endorse the size or the timing of the cuts. As a result experts within the financial markets have raised their bets for a first cut in June 2024 as Governor Bailey confirmed that the UK was on the way to winning the battle against inflation. Interestingly, Chancellor of the Exchequer Jeremy Hunt has alluded to an October 2024 general election, so in order to avoid criticisms of bias towards the government and to assert their independence, any interest rate cuts will have to be made sooner rather than later.

Interest Rate Overview: Eurozone, United States, United Kingdom February 2024

As predicted by many commentators, the governing council of the ECB (European Central Bank), the Federal Open Market Committee (FOMC) of the United States Federal Reserve and the Monetary Policy Committee (MPC) of the Bank of England, all kept interest rates on hold. All three central banks cited the continuing fight against inflation as the reason for keeping interest rates on hold, but as many experts are predicting, interest rates will fall in 2024 in all three jurisdictions.

The Eurozone

On Thursday 25th January the Governing Council of the ECB announced for the third time in a row that interest rates were being held at a record high of 4%, reaffirming their fight against inflation. Many traders and analysts in the financial markets are betting on a rate reduction at the next Governing Council meeting on April 11th, 2024. 

However, Governor Christine Lagarde announced it was “premature to discuss rates”, though some unnamed members of the council have added that if upcoming data shows that inflation is beaten, then the April meeting could be dovish for a fall in interest rates at the June meeting. Despite these utterances, many in the financial markets believe the ECB have got it wrong and will be forced to cut interest rates in April.

The United States

On Wednesday January 31st, 2024, the Federal Reserve kept policy rates at a 22 year high of 5.25% – 5.50%, where the Chairman of the Federal Reserve Jerome Powell gave a massive endorsement on the economy’s strengths. He further advised that with the on-going expectation of falling inflation, coupled with economic growth, that rates had now peaked and would fall in the coming months. However, despite this pledge, Chairman Powell went on to say that he did not expect a rate cut at their next policy meeting in March, as they wish to see on-going positive data on the reduction of inflation to their figure of 2%. 

Interestingly, the Federal Reserve is hoping to accomplish beating inflation through tighter credit without putting the economy into recession, which historians suggest they only accomplished once in the last 100 years. But with inflation falling more quickly than expected, (2.6% as at close of business 2023), the Chairman is coming under political pressure to reduce rates in March. 

A massively divided country is going to the polls in November to elect a new president, and Chairman Powel received written requests to reduce interest rates from Senator Elizabeth Warren (Dem, former presidential candidate), and Senate Banking Committee Chair Sherrod Brown (Dem). Some market experts are suggesting that there is a circa 63% chance that the Federal reserve will cut interest rates in March, but with seven weeks of economic data to come the markets will have much to mull over.

United Kingdom

On February 1st, 2024, the Bank of England’s MPC announced that it was holding interest rates steady at 5.25%, admitting that a rate cut had been part of their discussions. In the end there was a split decision in the MPC with six members in favour of holding, two members voting to increase rates and one member voting for a drop in interest rates. Interestingly, this is the first time since the Covid-19 pandemic that a rate-setter has voted for a cut in interest rates, and the first time since the global financial crisis of 2008, that there has been a three-way split in the MPC.

Following the announcement, The governor of the Bank of England Andrew Bailey announced that “the level of bank rate remains appropriate, and we are not yet at a point where we can lower rates”. He also pointed out that there is an upside risk to inflation due to continuing trade disruptions, and ambiguously advised how long policy remains restrictive depends on incoming data. However, experts suggest that the Bank of England is now warming to rate cuts in 2024, with officials believing that consumer price inflation will be at 2% in the second quarter, mainly due to falling energy prices., a year earlier than forecasted last November.

Market analysts mainly agree that whatever the statement that comes out of the above central banks, interest rates are set to fall in 2024. It would appear that the Bank of England is set to lag behind the ECB and the Federal Reserve when it comes to cutting interest rates. However, better than expected January US employment figures may delay a US interest rate cut beyond March, and as to whether or not they all fall at the same time, only time will tell.

 2023 Closes with Global Equities Charting Big Gains

As the financial curtain came down, marking the end of 2023, a heart-stopping rally in the last two months of the year showed global stock markets with strong annual gains due to investors betting on the fact that major central banks have finally stopped their monetary tightening policies and will indeed cut interest rates 2024. The MSCI World Index* has, since late October 2023, surged by 16%, and, with a flurry of late trading on the 29th of December, showed an annual gain of 22% . This was reflected in recent data showing that in western economies inflation is falling faster than expected, which, as mentioned above, dramatically changed the perception of interest rate changes. Indeed, Jerome Powell, Chairman of the Federal Reserve, fanned the flames of an equity rally in December by announcing that borrowing cost may have peaked.

*MSCI World Index – This is a stock index maintained by Morgan Stanley International (MSCI) and is designed to track broad global equity-market performance. This index is composed of stocks belonging to circa 3.000 companies from 23 developed countries and 25 emerging markets. 

The rise in global equities as reflected in the MSCI World Index is the best run on an annual basis since 2019, when a similar run reflected a 25% gain. The S&P 500 finished the year up by circa 24% which was mainly due to a massive rally in megacap tech stocks.  European markets, after a lacklustre 2022, posted positive gains in 2023 with Italy’s FTSE MIB charting gains of circa 30% and Germany’s DAX coming in with an impressive 20% increase. The overall increase for European equities was reflected on the STOXX 600* charting a gain of 12.6%. Elsewhere all three indexes in Japan posted hefty gains in 2023 with the Nikkei Stock average finishing the year up 28%, this being the best rally since 2013 which reflected a rise of 57%. 

*STOXX 600  Index – This index tracks 600 of the largest stock exchange listed companies from 17 countries in Europe. The countries represented are Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

The big omission from the global rally in stock markets is China, where the world’s second largest economy has suffered from problems in their property sector. As a result, the expected recovery has faltered. Indeed, China’s CSI 300, which measures the largest companies listed in Shenzhen and Shanghai, fell by 11.38%. Their flagship financial centre, Hong Kong, has suffered over the years and in 2023 stocks were particularly hard hit, with experts advising the Hang Seng index is the worst performer of 2023. 

Sadly, in the United Kingdom the FTSE lagged behind their counterparts in the United States and Europe by posting a gain of 4% in 2023. Experts suggest that this is down to a stubborn inflation rate, energy companies that are oil-price exposed, and a preponderance of mining companies that are overexposed to and rely on a slowing Chinese economy.

Many expert strategists seem to be sitting on the fence when calling the outlook for 2024. This year will determine the fate of the political leadership for half the global economy, the final battle against inflation and the fate of the current business cycle. The IMF (International Monetary Fund) has issued figures for world growth in 2024 as 2.9% with investors being excited as the IMF issued growth figures for the Asia Pacific region as 4.2%. Specifically in Singapore, Vietnam and Taiwan, analysts suggest these countries could outperform in 2024 due to the potential upswing in global tech, as they have a high concentration of manufacturing and R&D facilities. All in all many experts are suggesting a wait and see policy, as we see how the US/China relationship unfolds, the on-going ramifications of the Russia/Ukraine war, where interest rates stand in June this year, and whether or not the USA economy enjoys a soft landing.

 Final Call for Interest Rates Going into the New Year

On Thursday 14th December 2023 at the final MPC (Monetary Policy Committee) of the year, after a vote of six to three, the Bank of England maintained the status quo and left interest rates unchanged holding steady at a 15 year high of 5.25%. However, the rhetoric remains unchanged as the Governor Mr Andrew Bailey advised “There is still a long way to go in the fight to control inflation”. 

The governor further acknowledged that despite financial markets expectations, he pushed back against an expected rate cut in May 2024, as the MPC warned they may tighten monetary policy if price pressures persist. The MPC were quick to point out that the two key indicators of price pressure which are service and pay inflation remain elevated, and the United Kingdom remains the only major economy where food price increases remain in double digits, with the UK’s inflation figure of 4.7% being the highest of the G7 countries.

Across the Atlantic Ocean in the United States, on Wednesday 13th December 2023 the Federal reserve once again left interest rates unchanged. However, the Chairman Jerome Powell confirmed that the FOMC (Federal Open Market Committee) is still prepared to resume monetary tightening policies and increase interest rates should price pressures return. 

At the same time, in a more dovish stance,  the Federal Reserve leaned towards reversing their interest rate hike policies, by issuing forecasts that showed a number of rate cuts would be likely in 2024. However market experts pointed out that in November, increases in service-sector costs and in particular housing has kept inflation stubborn enough to counter any Federal Reserve interest rate cuts in the near future.

In Europe, the ECB (European Central Bank), along with their counterparts in the United Kingdom and the United States, kept interest rates on hold for the second meeting in succession. The deposit rate remains at a record high of 4%, even though inflation is heading south. The ECB confirmed that keeping interest rates high will make a substantial contribution to returning consumer price growth to the goal of 2% and they further advised that they will increase the speed of its exit from the pandemic era of stimulus which cost them Euros1.7 Trillion. 

The ECB will also increase the speed at which they are ending reinvestments under PEPP bond buying programme*, putting monetary policy tools into a tightening mode. Financial markets are expecting an interest rate cut in March 2024 despite Christine Lagardem, the ECB’s governors’, comments that policy rates will remain at sufficiently restrictive levels for as long as necessary. Markets noted with interest the wording “inflation is expected to remain high for too long” had disappeared from central bank rhetoric and was replaced with “inflation will gradually decline over the course of the next year”.

*PEPP Bond-Buying Programme – Otherwise known as the Pandemic Emergency Purchase Programme was an ECB instigated response to the Covid-19 crisis. Initiated on the 20th March 2020, it is a temporary asset purchase programme of public and private sector securities. These purchases cover sovereign debt, covered bonds (an investment debt comprising of loans that are backed by a separate group of assets), asset-backed securities and commercial paper. 

Elsewhere and outside of the major central banks, Norway increased interest rates for what is expected to be the final time with Russia also raising their cost of borrowing. Meanwhile, Mexico, Pakistan, the Philippines, Switzerland and Taiwan all maintained the status quo by keeping interest rates unchanged whilst Brazil, Peru and Ukraine all cut their borrowing rates. 

At the end of 2023, whilst the Federal Reserve, the Bank of England and the ECB all kept interest rates unchanged, it appears that the Bank of England will have a different policy to the other two central banks going forward in 2024. Whilst the ECB remains hawkish with an exit from the pandemic stimulus, there is still an anticipation of an interest rate cut in March of next year. The Federal Reserve has been more forthcoming issuing forecasts of interest rate cuts in 2024, with the most hawkish of them all being the Bank of England who are sticking by their statement that interest rates will remain high for as long as deemed necessary. However, recent data showing the UK GDP results being worse than expected may push the Bank of England into reassessing their monetary policy for 2024 forcing them into a small interest rate cut.

The Global Housing Market Crisis of 2023

Sadly, for many people throughout the world, higher interest rates besetting global property markets are diminishing the prospects of home ownership. In 2022 central banks started employing quantitative tightening monetary policy and raising interest rates in their fight against inflation, the resultant shock that rippled through global housing markets gave way to the reality that the real estate boom was at an end, marking a finish to the millions made by people across the globe.

It would appear that higher interest rates are here to stay for a while longer, keeping borrowing costs high, this together with a shortage of homes are keeping prices elevated. This has resulted in those homeowners who have had to reset their loans facing increased financial hardship, whilst in many areas housing is now less affordable. For instance, in the United States the home market is dominated by the 30-year mortgage and today it is effectively frozen, as buyers are being squeezed because those with lower interest rate mortgages are reluctant to sell. 

In each country across there are differing scenarios, but in the end they are all dragging down global economies, as whether they rent or buy, people are using more of their net income for housing. Take for example Canada and New Zealand, where those who bought at the top are now struggling with higher repayments on their loans. Across the world landlords are suffering from distress and in many areas higher interest rates have negatively impacted on the building of homes. 

Experts suggest that the “Golden Age” of single family homes is ancient history with the cost of home loans doubling in some parts of the world. If potential home buyers bought just after the global financial crisis then in most parts of the world owners would now have built up a substantial amount of equity. They predict that the next ten years will be an uphill battle for many new home buyers or even for those looking to trade up. For example, in the United States the current 30-year mortgage is circa 7.4% and over the next decade is expected to be around the 5.5% mark, whereas in the comparable low early part of 2021 it was 2.65%. In 2011 the average 30-year mortgage was circa 3.9% and slowly reduced over the next decade, making it the optimal time to buy.

Interestingly, back in the 1980’s, John Quigley, an economist at the University of California, Berkeley, identified what was to be known as the lock-in effect. Between 1978 and 1981 mortgage rates had doubled from 9% to a staggering 18%, which left millions of households paying well below the market rate for mortgages . Therefore, to purchase a new home meant adding possibly unsustainable costs to the monthly household bills, which was a powerful reason to not to move, hence the lock-in effect.

Economic incentives quite often make people forget lessons learnt in the past, as Quigley’s “lock-in effect” was quietly forgotten as interest rates fell back. However, this all changed when the Covid-19 Pandemic hit. In 2020 the US housing market briefly shut down, then a housing boom exploded (not seen in decades) due to a combination of plummeting borrowing costs and stimulus payments. For the first time in fourteen years existing home sales hit six million annually. The market was seeing house hunters purchasing homes far from the coast (the most popular areas before the pandemic), mainly due to the new remote working policies. Today, the quantitative tightening policies of the Federal Reserve has reduced demand and reduced supply even more due to Quigley’s “Lock-in Effect”

Unfortunately for home buyers, even as inflation begins to recede and central banks reverse their strict monetary policy of interest rate hikes, they have to face the reality that borrowing costs on their mortgages may never return to the lows during the fifteen years seen since the global financial crisis. In the past, if interest rates shot up, consumers were confident that rates would return to what was perceived as normal. They would be able to struggle through the higher rate or take on mortgages with a view to refinancing at a later date when interest rates once again fell. Today, these options will not be available because as previously stated, higher interest rates and costs look like dragging on for quite a number of years. 

Experts in the United States are referring to the housing market as the start of the glacial period due to the collision of the highest mortgage rates in a generation (timeline 20 – 30 years ), a low inventory and rising prices. As a result, recently released data shows sales of previously owned homes having dropped to their lowest level since 2010, with contract closings in October falling by the most in the last twelve months and dropping by 4.1% from September of this year. Further data released from ICE (Intercontinental Exchange Inc) show that the housing market in the United states is the least affordable in forty years. The data further confirmed that circa 40% of average household income is now required to purchase your average home. 

Expert analysts predict that in 2024 the housing market will feel the most severe effects of higher interest rates and sustained higher mortgage rates as they estimate transactions in this market will fall to their lowest levels since the 1990’s. The glacial period that is being deferred on the United States housing market will have many knock-on effects. For instance, families may be forced to live together, and as the elderly age without moving, homes will be kept off the market which could have been made available for purchase by younger buyers. Furthermore, there are a vast number of homeowners who are unaffected by the increase in interest rates (as 30-year mortgages were negotiated when interest rates were low), and they are also sitting on a near-record amount of equity. In other circumstances, there may have been forced sales or foreclosures which would have opened up purchasing opportunities for potential buyers. 

Away from the United States things are just as bad in many housing markets with New Zealand being an extreme case. New Zealand enjoyed possibly one of the largest pandemic booms as in 2021 property prices rose by an incredible 30%, and according to data released by the Reserve Bank, circa 25% of the then current stock of mortgage lending was taken out in 2021 and a fifth were first time buyers. However, mortgages are only fixed for three years or less, and interest rate hikes of 5 ¼% since October 2021 have sent mortgage repayments through the roof. The Reserve Bank has estimated that household disposable income that is used to finance mortgage repayments will be circa 20% by June 2024 up from a low in 2021 of 9%, more than double of what they were paying. However, thanks to strong wage growth many households are just about managing.

In China the property slump is not driven by interest rate hikes, but two years ago a government led clampdown on developers borrowing was the forerunner to a growing crisis. Today, China’s property market, which once accounted for 30% of the economy, is struggling with unresolved debts and slow sales leading to an economic decline. Potential buyers have been reluctant to invest in homes yet to be finished, due to a legal system that is not prepared to restructure debt and spreading defaults by home builders. However, the government has advised that it will target selected developers for financial aid, but insist the funding is to finish housing projects, not to repay debt.

In Canada many citizens profited from the housing boom of the last decade, and by 2020 had come to own more than two homes which, in British Columbia and Ontario, accounted for just under 33% of housing stock. However, data shows the introduction of higher interest rates meant that in a city such as Toronto owning a condo was now yielding only circa 3.5% after mortgage repayments and costs whilst Canadian Government Bonds were paying 5%. The high rates of interest have certainly put a damper on interest in new housing purchases, whilst some with investment properties are facing negative cash flows, forcing owners to sell, if indeed they can find buyers. 

Elsewhere, Europe is facing a housing crisis, as a collapse in home building threatens an increase in shortages over the next five years. Those countries that are hardest hit are among the wealthiest with building permits in France down by over 25% in seven months through to July 2023, and in Germany building permits were down 27% in the first half of 2023. In fact, when Olaf Scholz’s coalition took power in Germany in 2021, the Chancellor’s pledge of adding 400,000 new homes per year was sadly way behind schedule. In fact experts suggest that Germany won’t reach this figure until 2026 at the very earliest.

There is a massive construction crash in Europe with governments reluctant to spend any more funds than are absolutely necessary as they continue the battle against inflation in the post-covid era. Recent data shows that in Sweden in the first ten months of 2023, 1,145 companies within the construction industry filed for bankruptcy, an increase of 32% from 2022. 

Many politicians are advocating more spending on housing, even the Labour party in the United Kingdom (polls suggest a shoo-in at the next general election) are promising to overhaul the planning system and build 1,500,000 over the next term of parliament. However, as in many countries a manifesto promise and reality are often many miles apart. The German government has offered to boost public investment and simplify licensing procedures, but what analysts describe as a tepid response is not expected to make any significant impact. 

Without government investment and private sector investment many citizens across the world  will be unable to buy their own homes destroying the dreams of home ownership. The only winners appear to be those buyers in the United States locked into the 30-year mortgage when interest rates were at their lowest. The rest of the world can only hope that the property market returns to relative normality, but how long that will take is anybody’s guess.

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