The collapse of SVB and the outlook for US interest rates
Making sense of the latest trends in property and economics from around the globe.
4 minutes to read
SVB
Real estate investors don't need very long memories to feel unease when US banks collapse.
The implosion of Silicon Valley Bank on Friday, an institution with about $209 billion in assets, is arguably the biggest casualty of the prevailing cycle of rising interest rates to date. It also proves the mantra that things will break as we move deeper into this new era of higher rates.
The collapse itself has been well covered by specialists here and here, to take two (paywalled) examples. The key issues for global property markets at this stage are whether or not this particular crisis can be contained without further contagion, and subsequently, what the collapse tells us about broader systemic risk in the face of rising interest rates.
The answer to the first question looks clearer this morning. US regulators last night announced that all depositors of SVB would be made whole, whether insured or not. The outlook for some UK tech firms might look pretty bleak, but the government has been unequivocal that the collapse does not represent a systemic risk to the UK's financial services sector.
The second issue looks less clear cut, and it's up to central bankers to come up with an answer before key meetings later this month. Data in recent weeks has indicated that economies are still running hot, particularly in the US, but can policymakers be sure that SVB doesn't carry a message about strain that may be present elsewhere? Markets think there's enough in this for the Fed to take a breath - the chances of the Fed executing a 0.5bps increase in March stood at nearly 80% in the middle or last week, according to FT calculations based on fed fund futures. By Friday evening, that had fallen to 28%.
We talked in Friday's note about why the current moment is a crucial one for housing markets.
Confidence
September's disastrous mini-budget is now a distant memory for UK businesses. Confidence is now at its highest level since Russia's invasion of Ukraine twelve months ago, according to a survey from Accenture and S&P Global.
Only in Germany, where optimism has soared amid the easing of the energy crisis, has a more pronounced change in business activity expectations taken place since October (see chart). Levels of optimism in the UK were nearly double the average seen in the eurozone (+23%). Business confidence on a global scale was also at its highest for a year (+32%), but remained lower than the UK average.
Easing of price pressures and the improved demand outlook mean companies are hopeful of boosting profits over the next 12 months. The net balance of firms expecting a rise in profit levels turned positive for the first time in a year (+16%), with manufacturers proving more optimistic than services companies. Firms suggested that labour shortages will continue to pose an issue, although the proportion of businesses confident of finding skilled staff jumped from 34% to 44% during the month.
Global house prices
Global housing affordability is set to weaken over the course of the year as central banks raise rates and supply remains tight, according to 50 of 96 property market analysts polled by Reuters between February 15th and March 8th.
"Those markets that saw the strongest growth during the pandemic, so places like New Zealand, Canada, the Nordic markets, are probably likely to be most heavily affected," Kate Everett-Allen tells the newswire. Double-digit falls from recent peaks are expected in Australia (16.0%), Germany (11.5%) and the U.S. (10.0%).
Analysts expect a peak to trough decline of 8% in the UK, which is slightly more bullish than our own updated forecast, published Friday. Tom Bill takes a closer look at the recent improvement in UK housing market activity in his note this morning.
Bottoming out
Many of the worst affected markets have already endured substantial falls. Most still have some way to go, but we are seeing the early signs of bottoming out in several markets.
RBC thinks activity in the Canadian market will hit bottom sometime this spring, with prices levelling out a few months later. The recovery phase is likely to be protracted and the pace won't pick up until 2024, the bank believes.
Similarly Swedish apartment prices actually rose in February, the first increase in a year. That caps a peak to trough decline of about 15% so far, though that's likely to extend to 20% when all is said and done.
Of course a lot depends on interest rates and New Zealand shows that signs of stabilisation can be short lived should mortgage rates start rising again. Home values fell 1% in February, a reacceleration following signs of stabilisation at the back end of 2022.
In other news...
Mortgages to get more expensive because Bank of England ‘messed up’ on inflation (Telegraph), three global cities are pulling ahead since the peak of the pandemic (FT), and finally, US mortgage payments hit a record high (Bloomberg).