A push to restart London housebuilding

How much economic pain can US President Donald Trump endure in the run-up to the midterm elections in November? Consensus in the early days of the conflict was that America was relatively isolated from the worst effects of the energy crisis – imports account for less than a fifth of its total energy supply, the lowest share since the 1980s. 

That argument has steadily weakened as the conflict has dragged on, and new projections from the OECD lay bare the impact on the American consumer. The annual rate of inflation will rise to 4.2% this year, from 2.6% last year. That's the highest in the G7. Growth will slow from 2.1% last year, to 2% this year and a lacklustre 1.7% in 2027.

Consensus among economists still suggests that the Federal Reserve will opt for a prolonged pause, but traders have priced in about a 35% probability of a rate hike as soon as September. The sharp rise in long-term interest rates has pushed up the cost of everything from car loans to business borrowing and mortgage rates. The average 30-year mortgage has risen to 6.38%, up from less than 6% a month ago. 

Worse outcomes

The UK doesn't fare much better in the OECD projections. Inflation is projected to rise to 4% this year before easing to 2.6% in 2027. Growth is set to fall to 0.7% this year, a 0.5% cut from the group's December projection. That's the largest cut in the G7.

The report comes with the now familiar caveats. OECD assumptions are based on market expectations of a gradual decline in energy prices, but prolonged disruptions to shipping through the Strait of Hormuz "could lead to significantly worse outcomes."  The report also models a scenario where oil and gas prices rise by around a quarter and stay elevated, alongside tighter financial conditions. In this case, global GDP would be about 0.5% lower within two years, while inflation would be roughly 0.7 percentage points higher in year one and 0.9 points higher in year two.

We've talked about the divergence between consensus among economists and probabilities for interest rate hikes priced in by financial markets. In speeches, Bank of England policymakers have sought to play down the correlation between rises in energy prices and interest rates. 

"You can't draw a straight line between oil and gas prices and the likely path for Bank Rate," Bank of England Deputy Governor Sarah Breeden said yesterday. Alan Taylor, one of the more dovish members of the Monetary Policy Committee said he saw a high bar for hiking interest rates. Both pointed out that the risks of inflation becoming anchored were low due to the weakening of the labour market and the limited scale of the energy shock relative to 2022.

"Holding policy steady is preferable until the impact becomes clearer," Taylor added.

Kick-starting housebuilding

The government and City Hall published their long-awaited emergency measures to kick-start housebuilding in London on Wednesday. Developers started just 5,547 homes last year according to Molior, down 84% in a decade.

Measures are time-limited – schemes validated by March 2028 will be eligible. Five of the most notable include:

•    Late stage reviews, which give authorities the ability to claw back funds if the developer is deemed to be making more profit than was outlined in the original appraisal, have been replaced by an early-stage review tied to each permission.
•    Developments that include at least 20% affordable housing – with most of that set at social rent levels – will qualify for a discount on infrastructure charges.
•    A new City Hall Developer Investment Fund will support stalled schemes that can be delivered by summer 2029.
•    Build to Rent schemes that meet the criteria can count intermediate rent as affordable housing. At least 30% must be set at or below London Living Rent or Key Worker Living Rent, with the remaining 70% offered at other affordable levels.
•    Rules on density and design have been eased. New homes no longer all need to have windows on two sides, and limits on how many homes can be served by a single core have been loosened. Requirements for cycle storage have also been reduced.

Helping at the margins

Many of these measures will have a positive impact, and officials deserve credit for implementing policies that in some cases are politically difficult. That said, none of this is compulsory. Rather, boroughs are "strongly encouraged" to support qualifying applications. 

Meanwhile, there are certain exclusions for Purpose Built Student Accommodation and Co Living, affordable housing thresholds for public and industrial land remain at 35%, and there is still no design flexibility on daylight, privacy, overheating, balconies or unit mix. 

"Overall, this represents a much needed step forward in supporting housebuilding in London," says Knight Frank's head of residential development research Oliver Knight. "The removal of late stage reviews is a genuine shot in the arm for the market given their complexity and punitive nature which have acted as a deterrent to equity investment. That said, the measures are likely to help only at the margins in terms of raising delivery from current historically low levels. Alongside this package, the introduction of demand side support will be a vital pillar for the foundations of a wider recovery in London housebuilding."

In other news...

UBS gates €400mn property fund for up to 3 years (FT), and finally, UAE Developers Rush to Reassure Investors Wary of Iran War Risk (Bloomberg).