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Shares in UK property groups and housebuilders surged on Wednesday as investors dialled back their expectations for where interest rates might peak after inflation fell more than expected in June.
Persimmon, Barratt Developments and Taylor Wimpey rose 7.8 per cent, 6.4 per cent and 6.1 per cent respectively, helping London’s FTSE 100 advance 1 per cent, after data showed UK inflation last month dipped to 7.9 per cent, a 15-month low.
June’s modest slowdown in inflation will provide welcome relief for the property groups, housebuilders and other rate-sensitive sectors that dominate the FTSE 100 — which has risen a meagre 0.1 per cent so far this year — according to Russ Mould, investment director at broker AJ Bell.
“If there’s even a sniff of a peak in rates, you can construct a case for the FTSE 100 owing to its exposure to builders, banks, insurers and staples,” Mould said. “The thought process will be ‘oh, rate rises are coming more slowly, that means we’re near the top. And after the top there has to be a cut’.”
The UK property sector has endured a challenging few months as the Bank of England raised rates to 5 per cent to tackle the UK’s stubborn inflation problem. Higher borrowing costs have pushed up mortgage rates, dented sales and exacerbated concerns of a drop in house prices.
Barratt last week said demand for new homes dropped almost a third in the year to June 30, shortly after housebuilder Berkeley Group said sales of new properties decreased 15 per cent on a like-for-like basis in the year to the end of April.
Successive rate rises by the BoE had “reduced buyers’ spending power, weakened sentiment in the UK property market and acted as a drag on activity”, said Chris Druce, senior research analyst at Knight Frank.
A single modest drop in inflation was unlikely to change much, Druce added. “Nerves are unlikely to be calmed and the outlook improved until buyers can gauge where the new peak in the bank rate will be.”
June’s relatively benign inflation figures come after months of stronger than expected price growth. Traders on Wednesday lowered the level at which they think interest rates will peak to just under 6 per cent.
Others warn that rates have further to climb, further squeezing prospective buyers and homeowners. “The [BoE] has been clear that it must see the job through when it comes to bringing inflation down to its 2 per cent target, so it’s widely expected that it will raise interest rates again in a few weeks’ time,” said Clare Batchelor, mortgage operations manager at Wesleyan.
“Potentially, we’ll see even more rate rises beyond that later this year if prices are still rising too quickly,” Batchelor said. “This will ring alarm bells for those seeking a mortgage or who are about to slip on to a variable deal.”
In June, house prices fell at the fastest annual pace since 2011, according to mortgage provider Halifax, while the average rate on a two-year fixed mortgage last week hit 6.66 per cent, the highest level since 2008.
Separate data released on Wednesday showed private rental prices paid by UK tenants increased 5.1 per cent in the 12 months to June, the largest annual percentage change in data gathered by the Office for National Statistics stretching back to January 2016.
