Housebuilder shares slump as inflation remain stubbornly high

Shares in housebuilders fell sharply in early trading this morning after the government released data showing inflation remained stubbornly high in April, increasing the likelihood of the Bank of England raising interest rates further than previously expected.

Shares in both Taylor Wimpey and Persimmon fell by as much as 5% at points, with the UK’s largest builder, Barratt, dropping by 4.3% on speculation the Bank will now be forced to raise base rates to well above 5%, putting additional pressure on buyers of new build homes.

The falls came after the Office of National Statistics said annual consumer price inflation dropped to 8.7% in April as the effect of last year’s energy price hike fell out of the numbers, which is the first time it has been below double digits in seven months – but is much higher than the 8.2% expected by the market. In addition, the figures saw “core” consumer prices inflation, which excludes energy, food, alcohol and tobacco costs, rise from 6.2% to 6.8%.

Sushil Wadhwani, a former member of the Bank of England monetary policy committee that sets interest rates, and now chief investment officer at PGIM Wadhwani, said in an interview with the BBC that the latest inflation data was “incredibly disappointing” and that inflation now risked “becoming embedded”, which he said would be “a dangerous development.”

“Fundamentally if you look at the Bank’s own survey, people in the economy, both workers and firms are expecting inflation to say quite a bit higher than the Bank’s inflation target, that’s why I think the market now expecting interest rates to go even higher,” he said.

He said the financial markets were now expecting a peak in the Bank of England’s base interest rate at just under 5.5%, which would be a percentage point up from the 4.5% it sits at now, which he said was “quite a lot of tightening the markets are building in”.

“I hope we don’t have to go that far, because I’m very worried about the amount of tightening already in the system.”

Nicholas Hyett, Investment Analyst at the Wealth Club, said the stubbornly high inflation meant it was too early to celebrate victory in the Bank of England’s war against inflation. “Today’s numbers probably strengthens the case for higher interest rates at the next MPC meeting, and that means the pain will continue for consumers and businesses alike,” he said.

Oliver Rust, head of product at independent inflation data aggregator, Truflation, said he expected UK interest rates will need to hit at least 5% before inflation is fully under control.

Housebuilders are particularly sensitive to fears over interest rate rises, given the impact of higher rates on the ability of mortgaged buyers to afford new homes. After real world mortgage rates spiked in the immediate aftermath of the mini Budget last autumn, the last few months have seen mortgage rates first drop and then stabilise on expectations the Bank will not have to raise rate as high as feared during the short-lived Truss administration – with a peak base rate of 4.5% predicted as recently as February.

However, in recent weeks expectations for the Bank’s need to raise rates have again increased as the economy has performed better than expected, and inflation has remained higher than expected.

The inflation numbers came as the Land Registry also published March house price data showing a sharp fall in house prices in the month. The Land Registry said UK house prices fell 1.2% in the month to an average of £285,000, taking the annual price change to 4.1%.

This month-on-month drop came despite a mixed picture recorded by mortgage lenders at the time. The annual growth was the lowest seen since the autumn of 2020, more than two and a half years ago.