Is the housing boom on borrowed time?
Making sense of the latest trends in property and economics from around the globe.
6 minutes to read
House price growth accelerates
UK annual house price growth increased to 14.3% in March, from 12.6% a month earlier, according to the latest house price index from Nationwide. That's the highest rate of growth since 2004, leaving average prices 21% higher than they were at the onset of the pandemic.
Those are exceptional figures that are unlikely to be sustained for long. Here's Knight Frank Head of UK Residential Research Tom Bill on the numbers:
“In simple terms, if you are thinking of selling, you should act sooner rather than later. The cost-of-living squeeze and rising mortgage rates will undoubtedly take their toll on demand later this year. As we move beyond Covid and supply builds, this will also mean that house price growth becomes less eyebrow-raising. A strong labour market, high levels of household wealth accumulated during the pandemic and a slow trajectory for rate rises mean that prices will calm down without going into reverse.”
The unwinding
Indeed, a period of relative calm beckons. The government's spending watchdog expects house price growth to move between 1% and 4% between 2023 and 2027 with transactions returning to around 1.4 million a year, a level consistent with longer-term average rates of housing market turnover.
Stories of annual house price growth inching closer to 15% look disjointed next to warnings of households falling into "fuel stress", but the interconnected nature of the biggest drivers of house price growth are going to take time to unwind, whether that's ultra-low mortgage rates, the exceptionally tight jobs market or the seismic changes that people have made to their working and personal lives during the past two years.
In the Nationwide release (linked above) the lender's Chief Economist Robert Gardner suggests the continued buoyancy of housing demand is in part be explained by strong labour market conditions, with the unemployment rate continuing to trend down in recent months to 3.9% in the three months to January. On that front, we're already seeing signs of easing - the Recruitment and Employment Confederation (REC) reports that new job postings fell by 25% in the last week of March from a week earlier.
“The jobs market has been super-heated in the first few months of this year, and was always likely to stabilise in the spring. We may be seeing the first signs of that now,” REC chief executive Neil Carberry tells Reuters.
From FOMO to FOOP
The pandemic-era surge in house prices is beginning to give way in several global housing markets, whether due to government intervention, rising mortgage rates or other, more esoteric hits to sentiment.
In New Zealand, where annual gains neared 30% last year, FOMO (fear of missing out) is giving way to FOOP (fear of overpaying), with pressure increasing on sellers to adjust their expectations. The interest rate on a two-year fixed mortgage may rise as high as 5.5% by the end of this year, according to a survey of economists by Bloomberg.
Price growth is grinding to a halt in Australia, too. In Sydney, where the average home is valued at 17 times average incomes, the growth rate eased to 0.3% in the first quarter of 2022 from a peak of 9.3% last year. Meanwhile cooling measures introduced in Singapore are working, with price growth slowing to 0.4% in Q1, down from 5% in the previous quarter.
Back to the office
The average New York City office worker intends to cut time spent in the office in half, according to Nicholas Bloom, an economics professor at Stanford University who has surveyed an impressive 5,000 workers and 1,000 companies.
That's a big number, but Bloom appears pretty sanguine on the impacts. City centre spending by these workers could be reduced by half, which would be awful for retail, but he doesn't anticipate companies to reduce their office space by much despite shifting to models of hybrid working. He anticipates workers will do about a quarter of their work at home, up from 5% before the pandemic. That could rise by another 25% in the years ahead, he says.
Bloom's research suggests there's still a gap between what employers and employees want and companies are going to spend much of this year working out how to implement the right level of hybrid working without losing talented workers or sacrificing profits and corporate culture.
I'm still wary of giving too much weight to surveys on how workers feel about the office of old, or at least how offices were often used, which is indeed on borrowed time. It's unsurprising that New Yorkers want to spend less time commuting long distances only to reach their desk and pop on noise cancelling headphones to drown out noise from colleagues. In the latest Intelligence Talks podcast on the future of work, Knight Frank Head of Global Occupier Research Lee Elliott turns that image on its head, suggesting offices will become places of "socialisation, education, collaboration and innovation." Attitudes to office work, and work more broadly, can only get better as a result.
Sentiment
Business sentiment has been rocked by Russia's invasion of Ukraine and it's now beginning to appear in surveys. A monthly gauge of business sentiment carried out by the Institute of Directors (IoD), fell sharply from -4 to -34 in March — the lowest point since October 2020.
A separate monthly survey by Lloyds Bank published yesterday showed business confidence posted the biggest month-on-month drop since the start of the pandemic. Global M&A activity fell by almost a quarter during Q1, according to Refinitiv data covered in the FT.
These surveys take time to put together and the situation is evolving rapidly, so we may see an improvement in the months ahead, though that's hugely uncertain for the time being. Some indicators suggest investors are growing more optimistic - the FTSE, for example, has now returned to a level last seen on the eve of the invasion.
In other news...
What is BREEAM? An occupier’s guide from Matt Hayes.
In Wednesday's note we talked about Knight Frank research showing law firms took more than a quarter of all the office space leased in the City of London last year. You can now read the full report here.
Plus, in a new Rural Market Update, Andrew Shirley covers geo-political risks from the escalation in food prices caused by the Russia/Ukraine war.
Elsewhere - China March factory activity contracts at sharpest rate in 2 years (Reuters), this is what happens when globalisation breaks down (NYT), how Biden's billionaire tax would hit the wealthy (Bloomberg), and finally, will ending a lucrative tax break ease or fuel the New York housing crisis? (NYT).