Property Borrowing Costs Drop (A Little) As Truss Resigns As UK PM

The resignation of Liz Truss as prime minister, alongside an unexpected statement from a senior Bank of England official, eased the cost of borrowing for increasingly embattled property investors on Thursday. 

The pound rose by 0.5%, and the yield on 10-year British government bonds declined by 5 basis points to 3.83% in the immediate aftermath of Truss’ resignation, Bloomberg reported. That implies that interest rates might not rise by as much as previously anticipated, albeit they are still set to rise significantly from current levels.

Truss resigned after 45 days in office, and even though she will remain in place until the Conservative party elects a new leader — who will then become prime minister — Truss is now guaranteed to have the shortest tenure as PM in British history. 

Rishi Sunak is considered most likely to be the next leader of the Conservative party. He lost a leadership runoff to Truss in the summer, campaigning on a policy of moderate tax rises — in stark contrast to the large, unfunded tax cuts proposed by Truss, which when unveiled sent the value of the pound crashing, causing bond yields to rise and pushing up interest rates for property companies.

Essentially all of those policies were reversed by Chancellor of the Exchequer Jeremy Hunt, who replaced Truss’ original pick of Kwasi Kwarteng last week, so Sunak coming in would not significantly alter government tax policy as it currently stands. Hunt has said he will not stand for party leader.

While Sunak might be the favourite to be the next prime minister after Truss, Sir Keir Starmer is an overwhelming favourite to be prime minister after the next general election, with the bookies putting the odds of a Labour win at more than 75%. 

When that election will be is open for question — a new Conservative leader could call an immediate election, or it could take as long as two years. But both opinion polling and betting markets indicate that property should prepare for a new Labour government. 

Whatever the bookies say, the resignation creates more uncertainty in the short term. And business doesn’t like uncertainty. 

“The politics of recent weeks have undermined the confidence of people, businesses, markets and global investors in Britain,” the Confederation of British Industry said in a statement. “That must now come to an end if we are to avoid yet more harm to households and firms. Stability is key. The next prime minister will need to act to restore confidence from day one. They will need to deliver a credible fiscal plan for the medium term as soon as possible, and a plan for the long-term growth of our economy.”

On the morning of Truss’ resignation, Bank of England Deputy Governor Ben Broadbent said interest rates might not rise as much as markets are expecting, which is that rates will hit 5%. 

Broadbent said if rates did get that high, it would cause a 5% hit to GDP.

His thesis was that although inflation is at a 40-year high, that will ease when foreign gas and food prices stop rising as fast, and so the Bank won’t need to hike rates as much as expected. If they do, it would mean material economic weakness, he said.