Phillip Shaw, chief economist at Investec, has predicted that the Bank of England’s Monetary Policy Committee (MPC) could bring the base rate down as early as June this year in the face of a more positive economy.
Speaking at Investec’s broker briefing, ‘Is the UK economy as safe as houses?’, Shaw said the economy has been “flatlining” for the past 12 months, but that not only could it have been much worse, the picture looks promising for 2024.
He said: “People always ask, ‘is the economy in a recession’, but the more important thing is it’s a very shallow recession, it will be very short-live.
“It’s almost stagnation rather than recession, and we see the economy gaining some sort of momentum through the remainder of this year.”
Shaw said that this trajectory, if suggested a year or so ago, would have seemed highly optimistic.
On the subject of inflation, Shaw noted that while the UK is above target, it has come a long way, with energy, food and goods price inflation down.
The higher rate has been driven by sticky services inflation, which is pinned to wage costs, and closely monitored by the Bank of England.
Shaw noted that the MPC was hampered by a number of factors when setting the base rate, including the delay in interest rate changes showing their effects in the economy, as well as unreliable employment data from the Office for National Statistics’ (ONS) Labour Force Survey.
He added that the transmission of higher base rates had not entirely hit the economy yet, with 15% of households with mortgages set to reach the end of their fixed term this year, going onto much higher rates, which will in turn affect spending power.
This was cited as one of the reasons why the MPC might be reticent to bring rates down, even if inflation figures prove positive in the early part of 2024.
Another factor Shaw noted was that the MPC might be reticent to cut rates too quickly, stung by the effects of doing so too slowly in 2020-22.
For Investec, the outlook was that there could be at least three 0.25% cuts in 2024, with the wider market hoping for four to five cuts, though Shaw said this was over-optimistic.
Turning to the mortgage market specifically, Shaw said it was highly unlikely to see a return to 7% or 8% rates in the near future, and that if this did happen it would likely be a “slow burn” rather than a sudden shock – barring the event of something like an “irresponsible Budget,” as seen under Liz Truss.
However, he did note that despite the rate war and overall rates coming down, it was still possible for fixed term mortgage rates to rise again this year.
Referencing the outlying predictions that house prices, mirroring affordability, might drop by 30%, Shaw said this was unrealistic.
He pointed to a peak-to-trough margin from 2022 to the present of about 5.5%, and the fact that there has not been a month-on-month fall in prices since August, according to Nationwide.
He said: “People underestimate how far prices rose during the pandemic.
“Even after the correction we’ve had, we’re about 20% on average above pre-pandemic levels.
“House prices rarely plummet. Typically, if there’s a shock to the economy, it’s turnover that takes the strain.”
Indeed, HMRC data shows that transactions have fallen sharply, following substantial volatility post-Covid.
However, Shaw noted that turnover has now stopped falling, albeit now standing 28% below pre-Covid levels, with mortgage approvals down 32%.
Nevertheless, he said: “There might be a little bit of a renaissance there.”
On the subject of affordability, Shaw noted that the price-to-earnings ratio had come down recently, having risen over a long-term period, and that housing was looking more affordable.
However, he warned that brokers should not make long-term comparisons simply using the price-to-earnings figures as a demonstration of affordability, as these fail to take into account mortgage rates.
Looking ahead to the Budget in March, Shaw voiced rumours that included scrapping inheritance tax (IHT) and making an income tax cut, but said that while Conservatives would likely use the announcement to curry favour pre-election, this would not be a “tax giveaway” like the Autumn Statement in 2023.
For 2024, Shaw’s policy predictions were that housebuilding would be on the agenda as ever, and that a revamped Help to Buy scheme was on the cards.
However, he denied hearing any rumours surrounding a potential change to – or holiday from – Stamp Duty Land Tax.
With data suggesting a 20% swing for Labour in the polls, there could be as much as a 180-seat “real landslide” win on the cards.
However, Shaw said it was unlikely that the Conservatives would call an election in May as a result of these figures, and that in the time until the more likely General Election period of October, various positive factors – driven by gentle economic recovery – could affect this swing.
Even with a Labour majority, Shaw noted that Keir Starmer was a very different prospect to the Jeremy Corbyn side of the party, and that Labour’s current policy was to reassure investors and markets, albeit remaining vague about the details.
Despite widespread predictions of upset and uncertainty in the face of an election – and more at the idea of an incoming Labour Government – Shaw told The Intermediary that the residential market would be unaffected, and that those on the buy-to-let (BTL) and property investment side, while more likely to be wary, would not lose much confidence in the market in reality.
Indeed, he added that BTL investors were already facing such tight tax and regulatory squeezes, that it was unlikely they would feel unduly threatened by a Labour Government, particularly one with such central leanings.
When asked whether the political system in place at the moment was having a negative effect on sustainable housing policy, Shaw told The Intermediary that the ideal would be to have a centralised, non-partisan approach to housing, but added that this was part of a wider issue, where short-termism in Government reaches far beyond just the property market.
