The Gulf's growth story meets regional instability

UK lenders began raising mortgage rates yesterday following the steep rise in borrowing costs since the war in the Middle East began. Nationwide and HSBC were the first to announce increases in fixed-rate products. HSBC also said it would increase margins on tracker products.

The large high street banks set the direction of travel for the wider market, so further increases across other lenders are now likely. How far this runs will depend on the scale and length of any energy price shock, and the degree to which it feeds through to inflation – all of which remain highly uncertain.

Rising mortgage rates are likely to weigh on activity that has been resilient so far this year. House prices rose 0.3% in February, following a 0.8% rise in January, Halifax reported this morning. That brings the annual growth rate to 1.3%, which is the strongest in four months. 

For an thoughtful take, I recommend Tom Bill's latest episode of Housing Unpacked, out this morning, in which Pepperstone research analyst Michael Brown explains why he still thinks the Bank of England will cut rates three times this year. Listen here, or wherever you get your podcasts.

Knocked confidence

Shares across the United Arab Emirates have been hit hard this week, led by those linked to tourism and real estate. Visible interceptions of drones and ballistic missiles, damage to airports and luxury hotels and scrambles for flights have all – perhaps temporarily – knocked confidence in a place that has long marketed itself to the world as safe and stable. 

The appeal of the likes of Dubai extends beyond that, of course – tax, diverse economic opportunities and the lifestyle are all significant draws – but they all feed into a sense of confidence that is very difficult to measure. This newsletter often returns to the degree to which the wealthy are now much more mobile than they were before the pandemic, which has been overwhelmingly to the benefit of the Gulf states. At the risk of repeating myself, how serious this is will depend on both the length of the conflict and the lasting sense of instability it brings to the region. Energy prices in Europe and the US will begin to normalise when the Strait of Hormuz reopens, but the region's stability is a more complex issue. 

Investors in domestic developers have one eye on the construction pipeline. Expatriates make up nearly 90% of residents and the residential market is reliant on off-plan sales. JPMorgan said last week that Dubai's demographic expansion was unlikely to absorb the 300,000–400,000 new units expected by 2028. "Foreign interest in purchasing property following the conflict will be critical," Abu Dhabi Commercial Bank economists said in a note covered by Reuters yesterday.

The FT's Gideon Rachman spoke to Emile Hokayem of the International Institute for Strategic Studies yesterday, who was sanguine about the outlook for the Gulf states (23 mins 20 seconds). Their financial wealth and long-term development strategies make them resilient – many have evolved into logistics, aviation and financial hubs. The response from governments such as the UAE also deserves credit, he said, noting that officials have communicated clearly, avoided large-scale panic and are well placed to rebuild confidence as conditions begin to settle. 

The Gulf states will "spend very heavily the day after to deal with losses to infrastructure, there will be big spending packages, there will be a global narrative campaign to fix things," Hokayem added. "But it does tell them that you cannot divorce yourself from a very unstable region."

The longest downturn

UK construction activity contracted for a fourteenth consecutive month in February, according to S&P Global. Reuters makes that the longest downturn since the financial crisis. 

Residential remains the weakest-performing segment, with the rate of decline accelerating since January. The data points to a sharp and accelerated decline in total new work across the construction sector. Lower volumes of new business have been recorded in each month since January 2025. The latest decline was mainly linked to sluggish demand conditions, although there were some reports of a turnaround in tender opportunities for infrastructure and energy sector work. The rate of purchasing price inflation hit a seven-month high as suppliers passed on rising raw material costs, especially metals.

Still, optimism had been returning – I'm assuming these responses were collected before the weekend. Business activity expectations improved to their highest level since December 2024. Around 42% of the survey panel forecast a rise in output levels during the year ahead, while only 12% anticipate a decline. 

Elsewhere in housebuilding – Barratt Redrow CEO David Thomas will retire in the final quarter of this year, to make way for Dean Banks, who currently runs Australian infrastructure services provider Ventia. Vistry also said that CEO Greg Fitzgerald would step down in May. Taylor Wimpey reported full year results and said the spring selling season has "started well." 

In other news...

Iran hits Amazon data centres in jolt to Gulf AI drive (FT), Wealthy Dubai residents race back to UAE to avoid tax bills (FT), Power prices in Europe swing wildly as Iran war stokes volatility (FT), Home Prices in Seoul’s Posh Districts Fall After Yearlong Rally (Bloomberg), Builders Oppose Senate Housing Bill Over Investor Ban Provision (Bloomberg), and finally, UK jobs market hit by longest run of staff cuts since pandemic (Times).