A raft of data released last week painted a glaring picture of the UK property market teetering on the brink of collapse following the fallout from Kwasi Kwarteng’s disastrous mini-budget.
The pressure is now on Rishi Sunak and Jeremy Hunt’s new budget plan to restore the UK’s credibility – and convince investors that the Bank of England needs to be less aggressive in raising interest rates to bring inflation back to 2% bring to.
The Royal Institute of Chartered Surveyors (RICS) survey has effectively shown that the UK housing market is out of time.
Most RICS survey results fell to their lowest levels since 2008 – a time when UK house price inflation slipped into negative double digits and transaction activity halved.
The RICS survey showed potential home buyers staying away from the market. In October, new buyer inquiries fell for the sixth straight month and at the third-fastest pace on record (excluding the pandemic period).
Expectations for sales activity over the next three months also fell to their lowest level since 1999, when the RICS survey began.
Real estate agents – who are emotionally and financially invested in the prospects for the housing market – have been slow to acknowledge deteriorating conditions. However, according to the RICS survey, a majority of estate agents reported that UK house prices fell in October.
The RICS survey also showed that expectations for house price changes over the next 12 months are now at their most pessimistic levels since 2010.
This follows Lloyds prediction that house prices could fall by 8 per cent in 2023. Similarly, Knight Frank has warned that UK house prices are likely to have peaked and could fall by 10 per cent over the next two years.
Builders are also feeling the pressure. Last week, Persimmon warned that sales rates fell 23 percent in the July-November period from the same period in 2021, with the pace of the decline accelerating in recent weeks.
Similarly, a statement from Taylor Wimpey said fewer homes would be built this year than originally planned, and implied sales rates have fallen 50 percent since early August.
The bottom line is that at current stretched valuations, the housing market simply cannot handle 6.5 percent mortgage rates.
Mortgage rates had skyrocketed in October as borrowing costs rose as a result of Kwarteng’s disastrous mini-budget from unfunded tax cuts. Something had to give up, and now it’s falling real estate prices.
Earlier this month, Bank of England Governor Andrew Bailey signaled to his bank’s monetary policy committee that markets had been too aggressive in pricing official interest rates to peak at 5.25 percent in mid-2023.
These efforts to downplay the market have had some success. Currently, the Overnight Index Swap (OIS) curve implies that the Bank of England will hike rates by 50 basis points to 4 percent at the December and February policy meetings, and then to a peak of 4.6 percent in 2023.
That leaves Jeremy Hunt – the UK’s fourth Chancellor of the Exchequer in 2022 – with a very difficult task in Thursday’s mini-budget. Should he implement the difficult £50 billion austerity measures needed to contain the deficit, he could do some to restore the UK government’s credibility.
Although tax hikes and spending cuts could cool the UK economy, one bright spot for Hunt is that he can convince markets that the Bank of England has less work to do to bring CPI inflation back to the 2% target , dampening their expectations for rate hikes – with mortgage rates eventually falling back below 6 percent.
That process will take time, however, and will almost certainly be “too little, too late” to give the UK housing market a meaningful recovery.
In any case, it seems a done deal that the Bank of England will hike interest rates to at least 4 percent. The reality is that the correction of inflated property valuations in the UK has only just begun.
Tech slowdown is a problem for the capital
The spate of job cuts announced on Meta, Stripe and Twitter has sparked fears that a key sector that protected Ireland from the pandemic could now be proving to be vulnerable.
Right now, the announced job cuts look relatively small, maybe close to 1,000. And government officials have reiterated that the picture is not consistent across the sector.
For example, TikTok, which has gained market share from Meta, is still in the hiring process. Last week the Irish Independent Microsoft and Workday officials reported that they continue to expect to expand their workforces over the next year.
Consolation can also be taken from the strong IDA FDI results for the first half of 2022. These showed that secured investments were up 9 percent from 2021, exceeding pre-pandemic levels and could eventually lead to an additional 18,000 jobs.
They also highlighted the still buoyant conditions in the medical device and pharmaceutical sectors.
Nonetheless, there is no doubt that events in the ICT sector now pose a threat to the Irish economy.
During the pandemic, the digitization process of the global economy accelerated – reflected in work from home, Zoom calls, Internet sales and advertising, which boosted the revenues and profits of Amazon, Facebook and Google, among others.
However, many of these tech companies have overhired and are more exposed to the current downturn.
This time, the pressure on consumer spending is due to real household incomes being eroded by energy prices, not high street closures – so tech companies will also be affected.
If employment in this sector is affected, it will be felt more in Dublin.
Since the beginning of 2019, employment in the capital has grown by 10 percent, or 70,000 jobs. Of this, a staggering 44 percent or 31,000 jobs were in the ICT sector.
There is also a possibility that the sector’s outsized contribution to GDP growth will reverse. In 2021, exports of computer services increased by 27 percent to 170 billion euros. Any drop here could well push down forecasts for positive GDP growth in 2023.
Ireland’s public finances may soon be exposed
One feature of the 2023 budget that received little attention was the Treasury Department’s estimate of the underlying budget deficit. That means without potentially volatile and temporary “windfall” taxes, the Department would have run Ireland with a sizeable budget deficit of £8bn in 2022.
Time and time again, buoyant corporate taxes have bailed out the treasury – allowing Treasury Secretary Paschal Donohoe to allow generous increases in spending. And this year is no different.
Corporate taxes for the first 10 months totaled 16.2 billion euros, up 69 percent from the same period in 2021 – and a whopping 42 percent more than the 11.4 billion euros the Treasury Department said in its forecasts.
Could that revenue now be in jeopardy? Could they even fall behind?
Just 10 companies now account for over 50 percent of corporate tax revenue. But even within that number, the concentration can be quite high – maybe just two or three companies with a very high percentage.
According to the Revenue Commissioners, 4.2 billion euros (27 percent) of the 15.2 billion euros in corporate tax revenue in 2021 came from the information and communications sector. The slowdown in ICT is clearly a threat here.
Certainly, it would not be wise for the government to expect public finances to see another record year of corporate tax growth in 2023 or into 2024 or beyond. The time may soon come when Irish politicians will be forced to ask voters harder questions.
In order to sustain the strong growth in spending needed to provide Sláintecare to meet climate change targets, implement the national development plan and meet the costs of an aging population, income tax increases may need to be considered.
Perhaps the ICT slowdown will pay a little more attention to these difficult issues.
Conal MacCoille is chief economist at Davy
https://www.independent.ie/opinion/comment/the-uk-has-just-proved-that-a-sky-high-housing-market-cannot-cope-with-high-interest-rates-42138107.html The UK just proved that a sky-high housing market can’t handle high interest rates