Sensemaker: Peak house

Long stories short

• Germany delivered its first Iris-T air defence system to Ukraine.
• Alex Jones, the conspiracist, was told to pay $965 million to families of victims of the Sandy Hook massacre.
• Mo Salah scored the fastest hat-trick in Champions League history to help Liverpool beat Rangers 7-1.

Peak house

That muffled screaming sound is the one that starts at the top of the rollercoaster, before the drop. It’s the sound of

• estate agents begging solicitors to hold their chains together;
• first-time buyers clinging to the mortgage they can afford before their lender pulls it off the market;
• the super-prime broker watching inflation and the tumbling pound wipe £20 million off the value of a £55 million Mayfair mansion; and 
• asset managers offloading property fund holdings in case the market really tanks.

Average UK house prices rose by two-thirds in the past decade and 15 per cent in the past year, in a colossal transfer of wealth from future taxpayers to present homeowners largely via the miracle of quantitative easing – of printing money.

The result is an average house that cost 2.8 times average earnings in the 1990s costs 6.4 times average earnings now. 

Party’s over. House prices are now due a 10-15 per cent fall in the next year, depending on your forecaster. Adjusted for inflation nudging 10 per cent and mortgage rates rising to 5 or 6, that could equate in some areas to a real-terms price crash of up to 25 per cent. 

Cause. Rising inflation and bank rates (the latter now going up four times faster than during the 2008 financial crisis) have hit the affordability and availability of mortgages, and thus demand for property.

• The number of new homebuyers fell last month for the fifth month in a row, according to the Royal Institute of Chartered Surveyors’ latest monthly survey out today.
• The number looking for new-builds is at its lowest in three years. 
• Weekly reservations for new homes from Barratt, the UK’s biggest builder, are a third lower than last year, and share prices across the sector are down by at least half. 

Effect. There should be a pick-up in demand as prices fall, but in the meantime 2.4 million of the 8.4 million UK homeowners with mortgages will come to the end of fixed-rate products by the end of next year. Assuming rates are at or near 6 per cent as these borrowers seek out new lenders, the WSJ says the impact on affordability will mean the biggest shock to the housing market since the crash. 

The caveats. Two cohorts at opposite ends of the income scale will be partially protected from rate rises: 

• Young people. Only 28 per cent of UK households have mortgages compared with more than 40 per cent in the 1990s because fewer young workers can afford them.
• Old Tories. Two thirds of them have no mortgage at all, Bloomberg reports. They own their properties outright. 

But Labour reckons monthly payments for a typical family with a £217,000 loan will go up by about £500 when they remortgage, and Full Fact can’t find much fault with the arithmetic. Another way of looking at the same squeeze: the average share of net monthly income going on mortgage payments will jump from under 35 to over 45 per cent for borrowers switching from 2.5 to 6 per cent.

And there’s more. Base rate rises are playing havoc with property funds and real estate investment trusts:

• On Tuesday Columbia Threadneedle, the asset manager, closed a £453 million fund to new redemptions (withdrawals), partly as a result of pension managers dumping holdings to raise cash.
• Yesterday Oli Creasey, an analyst at Quilter Cheviot, said industrial property was the main sub-sector affected so far “but if base rates go on up the impact is going to be felt everywhere” including office space, hotels and residential property. 
• Today and beyond, contagion causing other funds to close to redemptions is “definitely possible”, Creasey says. Columbia Threadneedle had a cash cushion of only 3 per cent while most property funds have more like 15 – “but we don’t know how deep investors are going to go in terms of getting their money back”.

For his own part, Creasey isn’t cashing out of property funds completely. He wants to be there when the market bottoms out because that’s when “the magic comes”. Who said rollercoasters weren’t fun?

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CAPITAL ECONOMY, BUSINESS AND FINANCE

Discount Russian oil
For cash-strapped emerging economies, Russian barrels of discounted oil look “very tempting” right now. Sri Lanka, which effectively ran out of fuel earlier this year as its economy imploded, has sourced more than half its crude from Russia since May this year – the first time, says the Financial Times, that the country has imported Russian oil since 2013. Analysts said Sri Lanka was a “bellwether” of what to expect from poorer countries over the coming months as they tackle rising inflation and a strong dollar – Russian oil is trading about $30 per barrel cheaper than the benchmark rate due to western sanctions. India and China are Russia’s main oil customers, but inflation-hit countries including Pakistan and Cuba are joining the list. The cost: all abstained from last night’s UN vote condemning Moscow’s illegal annexation of four regions of Ukraine. 

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TECHNOLOGY AI, SCIENCE AND NEW THINGS

Diverted
Last month we brought you the first part of the story of Dimorphos, the asteroid Nasa was trying to nudge off course to prove the principle that it’s possible to protect Earth from catastrophic collisions. The second part is, it worked. A non-catastrophic collision of the Dart probe (double asteroid redirection test) with Dimorphos on 26 September was intended to push it closer to its big sibling asteroid, Didymos, shortening its orbit by 10-15 minutes. In fact the orbit was shortened by 32. Scientists think the better-than-expected result is because Dimorphos is quite crumbly and doesn’t have as much directional momentum as it would if solid rock. 

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The 100-year life health, education AND GOVERNMENT

Vaccine failures 
Despite President Biden’s claim last month that “the pandemic is over”, Covid is not going anywhere. Vaccinations will be key to keeping a lid on infections this winter, as well as reducing serious illness. But when Biden made that statement, $10 billion was slashed off the value of Covid vaccine manufacturers. Why it matters: The best bet for protection against Covid-19 mutations and future pandemics is to develop alternatives to intra-muscular vaccines like nasal sprays and tablets. There are trials in progress in the US and the UK for nasal vaccines, but Oxford University’s most recent results were not promising and America’s chief medical adviser Anthony Fauci is warning the development of more promising trials in the US will be delayed without sufficient funding. 

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Our planet CLIMATE AND geopolitics

Tantalising soil
The planet’s soils hold three times more CO2 than its forests and other plants. That’s around 20 times more than humanity can afford to release while still having a chance of limiting global warming to 1.5 degrees C compared with pre-industrial levels. So if it were possible to increase soil carbon uptake the world over, even by only a small percentage, you could halt climate change. This is a theme of Isabella Tree’s book, Wilding. But equally if soil carbon uptake falls the planet will accelerate past landmark global warming temperatures even quicker than it’s already expected to. A guest post on Carbon Brief says fluctuations in soil carbon content are five times wider than those caused by human activity. A powerful argument, surely, to do right by worms.

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CULTURE soCIETY, IDENTITY AND BELONGING

Met nyet
London’s Metropolitan police force will stop recording the ethnicity of drivers stopped by its officers, according to the Guardian. The Met, Britain’s biggest police force, was the first to start recording drivers’ ethnicities in 2021 as part of a six-month pilot project aimed at tackling possible racial bias. Researchers found that black and Asian drivers were stopped at a higher rate than white drivers compared with their share of the population – although the difference was not as stark as when officers stop people in the street. Some officers said recording drivers’ ethnicity took too much time – around two minutes – and the Met is dropping the scheme, although said it would monitor results from other pilot schemes. Ricardo dos Santos, a Portuguese sprinter stopped by the Met, called the decision “a step backwards”.  

And finally…

Alaska’s Katmai national park was hit by voter fraud in their annual Fat Bear Week competition. Holly, also known as Bear 435, appeared to win in the semi-finals but an investigation found her ballot had been “stuffed” with 9,000 spam votes. The 1,400lb Bear 747, also known as ‘Bear Force One’, eventually emerged victorious. 

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Thanks for reading. Please share this round, send us ideas and tell us what you think. Email sensemaker@tortoisemedia.com.

Giles Whittell
@GWhittell

Additional reporting by Phoebe Davis and Jessica Winch. Graphic by Katie Riley.

Photographs Getty Images

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Bonnie and Clyde

In the final episode of Hoaxed, Alexi confronts Abraham and Ella about what they did in Hampstead – and why. And the police give Alexi some surprising news