The expectation is that numbers will continue to fall gradually into 2023. UK inflation rose by 10.7% annually in November, easing from a four-decade high of 11.1% recorded in October.
Figures from the Office for National Statistics (ONS) showed a monthly increase in the Consumer Price Index (CPI) of 0.4% last month, which is much lower than the 2.0% of the previous month. The CPI is a measure of consumer price inflation, which is the rate at which the prices of goods and services bought by households rise or fall.
According to the ONS, the largest downward contribution to the change in CPI annual inflation rates between October and November 2022 came from transport, particularly motor fuels, with rising prices in restaurants, cafés and pubs making the largest, partially offsetting, upward contribution. “Inflation may have edged down slightly, but it won’t feel like that to the average business,” Ian Hepworth, director of Croydon-based Funding Solutions UK, commented. “Businesses are caught in the perfect storm of soaring costs and reduced cashflow.
“Inflation is hiking up costs, but clients and customers are slower to pay. In the meantime, suppliers are tightening credit limits and want payments quicker. To compound this issue even further, supply chain disruption means that many businesses are having to carry more stock, which soaks up cash. Many businesses are suffering a serious cash flow crisis.”
Paul McGerrigan, chief executive at fintech broker Loan.co.uk, said inflation remains stubbornly high though there are economic signs that it has now peaked. “The expectation is that numbers will continue to fall gradually into 2023 as new food and energy supply deals are brokered, and some of the big government moves start to take effect,” he added. “Prices at the pumps have in fact dropped in the last month, but those drops have yet to filter through into the figures due to the lag in reporting. “Stability in No. 10 has helped to calm the markets and it feels like the wheels are slowly being reattached to the bus.”
McGerrigan pointed out that the Bank of England’s Monetary Policy Committee must “proceed with caution” too as it decides on another base rate change. “While it’s vital to get inflation under control, its fundamental not to choke growth and so, pushing rates too high and too quickly would not be advised,” he said.
“Interest rate rises have already poured cold water on the property market, and while a slowdown is positive, a significant drop in house prices is not. For consumers, considered financial planning remains vital to navigate the short-term storm of high prices, high interest rates and real-terms decline in income.”
Housebuilding’s Been Driving the Economy – But For How Long?
There was a rare bit of good news for the economy to kick of another week of cold weather last week and disruptive strikes, with official statisticians reporting that there was a 0.5% rise in gross domestic product, the broadest measure of economic activity, in October. That took monthly GDP back above its pre-pandemic level in February 2020, by 0.4%, confirming that whatever else you might say about the rollercoaster ride of the past 2-3 years, the pandemic recession was relatively short.
But, and there’s always a but in these things, much of the October rise was simply a reversal of September’s 0.6% drop in GDP, when there was an extra bank holiday for the Queen’s funeral, and when many activities were suspended during the period of national mourning.
Even the October bounce did not prevent a 0.3% drop in GDP in the latest three months. The pandemic recession, it seems, has been followed by another one, albeit a milder version.
There was something else that was quite striking about the latest crop of figures, however, and that was the extraordinary strength of private housebuilding. The Office for National Statistics (ONS) reported that construction output rose by 0.8% in October, reaching a new record level. Given that there was less of an effect from the Queen’s funeral than for other parts of the economy, most of that rise looks to have been genuine.
Within that increase, there was a hefty 2.9% increase in private new housing. It is a traditional criticism of the sector that not enough new houses are being built, but that was not true in October, or for that matter when it comes to the trend over the past 2-3 years.
October’s rise took the index for private new housing to 19% above its level a year ago, and near 8% above pre-pandemic levels. These figures, which are adjusted for inflation, are very strong, and could almost be described as a boom.
There was also a hint of good news in the figures on inflation in the cost of materials, with the ONS noting that “anecdotal evidence continues the narrative around the increased prices for certain construction products, however annual price growth is starting to ease from the high level in mid-2022; despite the current high prices, the construction industry is maintaining growth, and new orders books remain strong”.
That takes us to the key question. October seems like a long time ago, though it was in the wake of the September 23 Kwasi Kwarteng mini budget, which caused financial panic and sent mortgage rates soaring. In the past few weeks, the air has been thick with news and warnings of a housing recession, with lower prices and falling activity.
What will that mean for housebuilding?
Housebuilders reporting trading updates in recent weeks have been recording a drop in site visits and reservations, though most have yet to announce a reduction in their targets. Taylor Wimpey’s recent trading update signalled trading volumes this year similar to those in 2021, and that more sales outlets would be open by the end of the year, though the firm would be “selective” in land buying.
2023 looks likely to be a tough year for activity, probably tougher than for prices.
UK Finance, which represents the lenders, published its 2023 outlook on December 12. It predicts an overall fall of 15% in mortgage lending next year, returning to pre-pandemic levels, a bigger 23% drop in mortgage lending for house purchase, implying fewer first-time buyers “due to cost-of-living pressures and rising interest rates placing pressure on affordability”.
Buy-to-let lending will fall by even more, 27%, it predicts.
A lot of mortgage activity will be in refinancing, with many fixed rate deals for borrowers set to come to an end next year. UK Finance is also downbeat about property transactions in 2023, which it predicts will drop by 21%, from about 1.2 million this year to 1 million next year. The outlook has become more challenging, as is typical for a topsy-turvy year which began with such high hopes. A year ago, we had just had the first increase in official rates, from 0.1% to 0.25%.
Last week saw a rise from 3% to 3.5%.
The housing market has coped well so far, as have the housebuilders, as recent figures attest. But tougher times lie ahead, and we hope that the industry will look through the downturn.