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Real estate, Bank of England expects house prices to fall globally

The Bank of England warned of the possibility that house prices would continue to decline in many economies, stressing the substantial downside risks that threaten the real estate market in China.

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The central bank explained in the minutes of the meetings of the Financial Policy Committee, which were held at the end of September and early October and which were published on Tuesday, that further deterioration of activity and price declines could threaten the Chinese economy and financial sector with risks, which would extend to affect the United Kingdom and other countries.

The Financial Policy Committee said it would continue closely monitoring developments in the Chinese and Hong Kong real estate markets “and the possibility of repercussions on financial stability in the United Kingdom.”

United Kingdom The committee pointed out that the financial conditions of households in the United Kingdom are still under pressure after the successive increases in interest rates at the Bank of England since 2021 to curb inflation.

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The increase in the proportion of households that pay high rates to service debt is expected to continue next year. Nevertheless, the committee hoped this level would remain lower than the historical peak reached during the global financial crisis of 2007. At the level of the United Kingdom, new mortgage lending rates for 35 years or more increased by eight percentage points to 12% between the first quarter of 2021 and the second quarter of 2023. For private sector tenants in Britain, rents increased by 5.5% during the current year until last August.

Slowing house price growth in the United Kingdom amid abundant supply

The new flat areas sold in China fell by about half monthly compared to the levels of the period from January to June 2021, and real estate investment fell by about a fifth until last August on an annual basis.

Other essential points from the report:

  • Some valuations of risky assets, such as technology stocks and high-yield debt, seem exaggerated. These valuations could increase the likelihood of a more significant price correction if growth-threatening risks materialize.
  • The Bank of England will conduct a “desktop” stress test instead of a periodic scenario prepared annually during 2024. This training will use banking models and expertise to test the banking system’s resilience and allow testing more than one scenario for the overall economy.
  • The capital reserve rate against cyclical risks will remain at 2%.
  • Hedge funds continue to hold debt-funded investment positions in US Treasury bonds, including cash-based futures contracts that contributed to a shortfall in the US Treasury bond market during March 2020. The committee will continue to monitor these risks.

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