Effect of Weak Pound and Looking Ahead
Published / Last Updated on 27/09/2022
Last Thursday we saw the Bank of England only increase interest rates by 0.5%pa to 2.25%pa which we suggested was not enough to tackle inflation yet would not prevent us from moving into recession. On Friday we also saw the tax cutting emergency Mini Budget which again we suggested would do little to reduce inflation as VAT was not cut. So, prices will remain high and in fact, paying less tax may mean we have more money to spend thus sustaining inflation as well as an increase in Stamp Duty Nil Rate thresholds for both first time buyers and existing owner/buyers would only underpin higher property prices when pitched against lower than required but interest rate increases.
- Weak £ due to the $ being more attractive as interest rates are higher.
- Weak £ means imports will remain expensive and inflation will not fall.
We keep suggesting to you that the government wants inflation. Long term, sustained inflation over a 10-year period will drive all prices up, salaries up and property prices up. The positive for the government is that its mainly fixed rate Covid-19 debts of c £500bn and the £260bn to be borrowed this year (including £60bn of energy grants) will then be devalued over a period of time before they are due to be repaid in say 20-30 years. Governments need inflation when borrowing is high.
We suggest we are back to the 1970s/80s economic cycle of bust/boom/bust. The late 1970s saw huge inflation at over 20%, inflation at 17% and the ‘winter of discontent’ strikes in many industries. Does that picture look familiar when thinking about today? We decided to look back over the last 40 years and compare interest rates and house prices.
|
Period |
Interest Rates |
Average House Price |
Average House Price % Increase |
Comment |
|
October 1977 |
5% pa |
£10,000 |
+8.4% pa |
|
|
November 1979 |
17% pa |
£17,000 |
+30.8% pa |
Thatcher elected with UK having record gov. debt |
|
1980s Average |
12% pa |
£57,000 |
+20% pa |
1982 recession prices fell -0.6% and in 1989 interest rates hit over 15% |
|
1990s Average |
6% pa |
£75,000 |
+6% pa |
1992 prices fell -8.3% as increases were huge in the 80s at +20% pa |
|
2000s Average |
4% pa |
£175,000 |
+15% pa |
2009 Credit Crunch prices fell 15.5% but overall, still averaged 15% pa |
|
2010s Average |
0.5% pa |
£247,000 |
+7% pa |
Low interest rates, low inflation equals lower house price rises |
|
2020s so far |
1% pa – we predict interest rates could be at 6% to 7% pa next year |
£311,000 |
+12% pa |
Boom in prices after Covid-19 lockdown. Prices may fall back shortly but we suggest a similar boom pattern as in the 80s and then an early 90s style property crash |
Sources: Bank of England on interest rates and HM Land Registry on property prices.
When you look at the figures, house prices usually rise between 5% to 8% pa on average, over and above Bank of England base rates.
We forecast recession with possibly a minor fall in house prices as we adjust to higher interest rates again not seen since the 1990s and 2000s but then we see significant growth in property prices despite higher inflation and interest rates over the coming decade. Will it be +20% pa on average? We think not but we suggest if interest rates are at 6-7% pa for the next 10 years, then property prices may rise around 11% to 15% pa on average.
