Aurelia Butler

Rising mortgage interest rates are squeezing homebuyer budgets as the cost of living crisis threatens to put the brakes on two years of frenzied activity and soaring prices in the UK property market. Figures from the Bank of England released on Wednesday showed the effective interest rate on newly drawn mortgages — the actual interest rate paid — increased by 14 basis points in March to 1.73 per cent. The increase comes as the BoE’s Monetary Policy Committee considers again whether to raise its main interest rate to curb inflation. Rising rates are among several factors that could reverse two years of rapid increases in UK house prices, alongside soaring inflation, falling real incomes and diminished consumer confidence.“While housing demand potentially will be supported by the savings that households have accumulated during the pandemic, the combination of falling real disposable incomes, low consumer confidence and rising mortgage rates is too toxic for the housing market to come away unscathed,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics. Interest on mortgages has edged up since hitting historic lows during the pandemic lockdown, when the central bank slashed the base rate of interest to 0.1 per cent to cushion the economy. It has since increased the rate gradually to 0.75 per cent but, in a closely watched decision on Thursday, policymakers could announce a further increase, most likely to 1 per cent. Mortgage interest rates have edged up further in recent days. Yorkshire Bank, Clydesdale Bank and Metro Bank raised rates on selected mortgage products this week ahead of the expected BoE rate rise. BoE analysis of new mortgages showed new quotes for two-year fixed rate products at loan-to-value ratios of 75 per cent carried an average interest rate of 2.11 per cent last month, up from 1.23 per cent in August 2021.Some economists predicted a fall in prices as buyers are able to borrow less. “If we are right that interest rates will be raised to 1 per cent tomorrow and to 3 per cent next year . . . then it won’t be long before the housing market slows,” Paul Dales, chief UK economist at Capital Economics, said. “We think house prices will fall in 2023 and 2024, by around 5 per cent in total.”

BoE figures on Wednesday also suggested the housing market could be calming down — but analysts were divided over the extent to which this would affect demand and prices. Net borrowing of mortgage debt increased to £7bn in March from £4.6bn in February. The sharp rise reflected frenzied activity at the beginning of this year, as buyers scrambled to take advantage of low rates and demand outstripped supply, pushing up prices. However, March figures for the number of mortgage approvals, which indicate later purchases and future borrowing, were little changed at 70,700 compared with 71,000 in February.Mark Harris, chief executive of mortgage broker SPF Private Clients, said the figures indicated a more stable housing market. “This suggests that the froth has come out of the market, leaving a calmer, more measured, and ultimately more sustainable version.”Observers said mortgage rates were just one among several factors likely to limit housing demand. Economists have warned the UK could face a period of stagflation, with consumer prices increasing by 7 per cent in March, while GDP grew by just 1 per cent in February and real wages contracted by 1 per cent. Anthony Codling, chief executive of property platform Twindig, said rising rates were one of a combination of factors set to affect house prices, including a perception of greater risk and declining real incomes as the cost of living crisis bites. However he added that some aspects of the cost of living crunch could push up property values, with households still drawing on lockdown savings and assets like property proving a more attractive investment as inflation degrades the value of cash. “In the context of longer history, mortgage rates are still very low indeed,” he added. “I wouldn’t panic.” More

The writer is former head of Citigroup’s emerging markets investments and author of ‘The Gathering Storm’Pakistan is in political and economic chaos. Its most populous province, Punjab, was without a government for almost a month because the governor, who was appointed by former prime minister Imran Khan, had refused to administer an oath to the newly elected chief minister of the province. The president, Arif Alvi, a member of Khan’s party, is backing the Punjab governor’s actions.Meanwhile, Pakistan’s foreign exchange reserves have fallen sharply in the past two months. The new government hopes to stop the bleeding with an enhanced IMF package and more short-term loans from China and Saudi Arabia. Supplies of electricity to households and industry have been cut as the cash-strapped country can no longer afford to buy coal or natural gas from overseas to fuel its power plants.Newly elected prime minister Shehbaz Sharif was in Saudi Arabia last week to seek more financial assistance from the oil-rich kingdom, in addition to the existing bilateral credit of $4.2bn. Pakistan owes China $4.3bn in short-term loans in addition to the expensive loans to finance the power plants built under the China-Pakistan Economic Corridor programme.Pakistan’s finance minister Miftah Ismail met the IMF in Washington last month and requested an increase in the size and duration of its current $6bn fund programme, initiated in 2019.International commercial debt markets are practically shut for Pakistan. Its five-year sovereign bonds are trading near 13 per cent, which is among the highest in the emerging markets.Pakistan’s official liquid foreign exchange reserves (excluding gold reserves of about $4bn) have dropped to just $6.6bn, or by $6bn, since the end of February. The level of reserves provides cover for just one month of imports.According to Ismail, the fiscal deficit could hit Rs5.6tn ($30bn), or about 8.8 per cent of gross domestic product, versus a target of about Rs4tn, by the end of June. Pakistan’s volatile political situation makes it difficult for the new government to take any tough steps.The federal budget deficit in the first nine months of the current fiscal year jumped to a staggering Rs3.2tn, 53 per cent higher than compared with the same period of the previous year. A significant reason for this was Khan’s populist measures, including his decision to not pass the impact of rising oil prices to the consumer. It is costing about $1.1bn a quarter to subsidise petroleum products. However, this is not the only reason for the parlous state of the public finances.Pakistan’s rent-seeking political economy, dominated by the military establishment and special interests, provides Rs1.3tn in tax subsidies to the big businesses and the industries, according to Pakistan’s Federal Bureau of Revenue, its tax collection authority.However, Pakistan collects very little in taxes from the urban property market, which has been booming for some time, for example. Large houses or plots of land can cost anywhere between $500,000 and $2mn, but the owners pay little tax. According to Shahrukh Wani, an economist at Oxford university, all of Punjab, home to a population of more than 100mn, collects less in urban property taxes than the city of Chennai in India, with a population of about 10mn people.It is time for Pakistan’s rich to start paying their proper share of taxes. The IMF should not allow itself to be seen as bailing out the wealthy, which it seems to be doing by ignoring Pakistan’s repeated slippages in meeting the programme targets.The rich should also pay higher taxes on property and pay more for electricity and luxury cars than the low income or middle-class citizens who are already reeling from double-digit inflation (currently 13.4 per cent), which is the third-highest among major global economies. Steve Hanke, a professor of applied economics at Johns Hopkins University, has calculated Pakistan’s realised inflation rate to be a whopping 30 per cent per year, more than double the official rate. Further delay in carrying out meaningful economic reforms could lead to more economic hardship and social unrest. More

There are no atheists in foxholes, and there are no subsidy hawks in a supply chain crisis. A crunch in semiconductor production, a food shortage, a general sense that the global trading system is unreliable: suddenly, the fiscal valve is wrenched open and the public cash starts to pour.Having spent several years attempting to craft new rules to restrain trade-distorting industrial subsidies (aimed very obviously at China), advanced countries have rather undermined their own arguments by lining up lavish handouts themselves. The US and EU each have their own Chips Act to encourage semiconductor production, with a combined public spending boost target of about $100bn, after big spending programmes by Japan, South Korea and Taiwan. After years of trying to use the World Trade Organization and other forums to inoculate economies from the subsidy disease, Washington, Brussels and Tokyo have caught the bug themselves. The Global Trade Alert monitoring service says that even before the pandemic, 62 per cent of global goods trade was in products and on trade routes where subsidised American, Chinese, and European firms compete: the number of subsidy programmes has only increased since.The EU and US insist that their semiconductor subsidies will meet WTO rules. But even if a subsidy is legal, doesn’t mean it’s wise. The surge of spending might have been a good time to revise and tighten WTO rules: it has not been taken.Meanwhile, the global guardians of probity are sufficiently alarmed to have lumbered into collective action. The World Trade Organization, OECD, IMF and World Bank issued a joint report recently on using international co-operation to restrain distorting handouts. It correctly admits that clear definitions and undisputed taxonomies are elusive. Many subsidies are entirely sensible, indeed planet-saving, but the exact design is highly important. Paying households to install solar panels, which in effect compensates for the benefits of the carbon emissions saved, is totally justifiable: shelling out money to boost domestic solar cell production less so.The problem right now is that crises have a way of making bad subsidies look like good ones, at least in the short term. India, for example, supported by other developing countries, has been at odds with rich countries for years at the WTO over the support it gives to farmers. The government buys grains, particularly rice and wheat, above market prices and puts them into public stocks, some of which it distributes cheaply to households. So far, so cumbersome, compared with simply giving families income support. But also so relatively non-distorting of international trade as long as the stocks don’t get sold abroad. If they do, the government purchases begin to count as an illegal export subsidy.Yet there’s currently a shortage of wheat in food-importing countries, particularly in Africa, thanks to the disruption of sales from Ukraine and Russia. India has made hay, as it were, with the argument that it would love to sell its stocks abroad but the WTO is stopping it. In the longer term, it makes total sense to encourage efficient and competitive production and sustainable food security rather than create periodic gluts through distortive handouts. But presentationally it does look odd for India to be keeping food off the global market in a crisis just to stick to rules written for normal times. (To be fair, it would help if India accurately reported its subsidies, as required under WTO transparency guidelines.)The same is true for agriculture as for industrial subsidies: there are few big players innocent enough to take a principled stand. The EU and US have been increasing their own domestic agricultural subsidies in recent months and years. In the EU’s case, its recent sudden push to ramp up production is a reasonable enough short-term response to the global food crisis, and its planned spending remains well within legal WTO limits. But the US shelled out vast production-distorting subsidies for years to shield its farmers from the effects of Donald Trump’s US-China trade war, and before that has a long history of dumping agricultural surpluses on world markets in the name of humanitarian aid. Fishing faces the same problems. WTO members are trying to negotiate reductions in the fishing subsidies that are emptying the world’s oceans of life. Again, India is busy trying to exempt itself and other developing countries from new rules. But the EU in this case has its standing in the debate undermined by its own desire, under pressure from Spain and France, to hang on to fuel subsidies for long-distance fishing boats.In the face of all of this, the idea of effective international restraint to prevent trade-distorting subsidies remains, like the Spanish trawlers, well over the horizon. There’s unlikely to be a meaningful WTO deal on fisheries or farm subsidies soon. The EU and US are promising to use the bilateral transatlantic Trade and Technology Council to co-ordinate — or at least be transparent about — their semiconductor production subsidies. But realistically most constraints will come from unilateral means via traditional anti-subsidy duties or perhaps the EU’s new “foreign subsidies instrument” which in effect extends European domestic state aid restrictions to overseas companies competing in the EU single market.What is it that ultimately stops spirals of production subsidies? After the industrial interventions of the 1970s in rich economies, it was governments running out of money and a clear feeling that the handouts hadn’t worked. So, mark your calendars for let’s say a year or two from now, when public borrowing has probably got more expensive, the pressure on public spending in rich countries more acute and the billions thrown into semiconductor production looking less strategically brilliant. Until then, it’s a question of hoping that at least some of the public money lands on fertile [email protected] up to the Trade Secrets newsletter, published every Monday More