The FTSE 100 slipped up after an encouraging start in the early AM. The index is now down in the red along with its housebuilding constituents despite ‘encouraging’ house price data from Nationwide this morning.
Although house prices still declined 5.3% on an annualised basis, there was some encouragement to be found in the fact that the drop was better than expected. House prices remained relatively stagnant from August as markets had initially forecast a drop of 5.7% on an annualised basis.
John Choong, Senior Equity Research Analyst at InvestingReviews commented:
“The impact of lower mortgage rates may be starting to take effect as green shoots begin to appear. What's more, a return of buying volumes with autumn approaching should help to provide some support to any further retrenchment in property prices going into the winter. This would especially be the case if mortgage rates continue to decline as they have over the past few weeks.
With real wages now trending above inflation as well, there's reason to believe that house prices could find a bottom soon as affordability returns from declining mortgage rates and house prices.
Nonetheless, investors and lenders alike ought to be wary of further surprises to inflation. Although August's cooler-than-expected CPI print was a welcome surprise, the recent upticks in oil prices may present a number of unwelcoming shocks in the months to come, which could undermine the progress that's been made on the rate front.”
Despite the less gloomy data, potential investors should be aware that those earning an average income and wanting to purchase a first-time home with an 80% LTV would have to spend 38% of their post-tax pay on their mortgage — above the long-run average of 29%. Nonetheless, the one bit of encouragement is that this is down from 40% in August.
Still, swap rates have been steadily declining since August as markets anticipate that the bank rate has, or is at least close to peaking. Although rates aren't expected to return to their pre-pandemic levels in the medium term, strong wage growth with lower house prices should help to offset this ever so slightly.
Simon Bridgland, Broker/ Director at Release Freedom said:
“I think house prices will stay on their current trajectory for the remainder of the year assuming inflation data remains in a constant albeit slow decline. If they tinker upwards with the base rate, I can see more properties coming on in January as the bills start to bite in people's pockets. I think if this happens, it will be short-lived and we will see things stabilise with the base rate reducing further and calm starting to return.”
However, Graham Cox, Founder of Self Employed Mortgage Hub isn't as optimistic:
“Unchanged month-on-month property prices is surprising news from Nationwide, given the steep falls recorded in August. Nevertheless, it's highly likely house prices will continue to fall, as the nation's homeowners continue to transition from dirt-cheap mortgages to 'normal' rates.”
In reaction to this, Taylor Wimpey, Persimmon, and Barratt are all in the red, but Berkeley is the biggest loser amongst the ‘big five’ as house prices in the South West, where Berkeley builds a substantial number of its properties, declined by 6.3%. On the flip side, Bellway is the standout performer being the only housebuilder stock to be in the green. This is due to the improvement of house prices in the North, where most of its private completions are. The region was the strongest performing, as the annual rate of change improved to -2.0% from -3.3%.
In other news, broker Peel Hunt said that it saw “encouraging signs of recovery” in financial markets in the first half of the year, despite rising interest rates, slow economic growth, and high inflation.
As a result, the investment bank now expects its interim results to show a 3.2% increase in revenue to £42.4m. Investors were informed, "Whilst the exact timing of recovery cannot be predicted, there are encouraging signs that interest rate rises are bringing inflation under control, and we may be nearing the end of the current tightening cycle," investors were told.
Stephen Perkins, Managing Director at Yellow Brick Mortgages gave his thoughts on this saying, “It is always positive to see the markets doing well, as this is a true indicator of economic confidence in the short-term future”. His opinion was echoed by Gary Bush, Financial Adviser at MortgageShop.com, who said, “The positive FTSE news is good to see but expected, it's clear that the UK has weathered this additional storm quite well — we just need to see a period without lockdowns, war, and interest rate chaos. The future looks bright.”
That said, David Robinson, Co-Founder at Wildcat Law seems to think that markets will always move akin to a herd:
“Contrarian investor. You will find this statement in many fund houses and fund managers' marketing material, yet the truth is the city as a whole is a herd animal. With interest rate rises looking likely to be nearing an end many of their models will be triggering buying cycles. This may be a false dawn but there is definitely a more positive feel overall in the markets and a number of UK businesses in particular look good value. That is also combined with greater political security currently — Sunak is perceived as a safe pair of hands and Starmer is not causing any sleepless nights either.”
Either way, where Britain's premier index heads next will ultimately come down to a combination of geopolitical stability, the inflation outlook, and the UK economy. But with the FTSE 100 trading at its biggest discount in over a decade, there's certainly room for potential share appreciation in the medium term.