What to expect in 2023: five economic indicators for housing markets
Economic growth, inflation and interest rates top the key economic indicators for global housing markets in 2023.
5 minutes to read
Inevitably, in such turbulent times it’s hard to predict the future with any certainty, but the following five key metrics will be the ones that matter for global housing markets in 2023.
1. Economic growth to be tempered
Some economies, especially across Europe, have almost certainly already entered a recession and others, such as the US may soon follow. The chart below shows the average forecast values for 2022, 2023 and 2024 across the world, euro area and G7 nations.
Next year will see growth slow, but the view is that the downturn will be mild by historical standards and therefore an opportunity for economies to reset. The cost of debt and inflation are weighing on sentiment and spending, the path of which we discuss below.
2. Inflation peaked in 2022
The path of inflation will determine the course for interest rates and the results will reverberate through global asset prices. Central bankers, particularly the Federal Reserve’s Jerome Powell, were humbled by their error in assuming inflation would be transitory. As a result, they have doubled down on their commitment to tame inflation.
In the clearest message yet, this resolve seems to be working and peak inflation is in the rear-view mirror. The US headline rate has been falling since June with a November reading of 7.1%, a full two percentage points below the peak. Wage demands may start to alleviate with vacancies falling back, while global supply chains are easing and oil prices have fallen to be in the high $70s or low $80s at the time of writing – down from a high of $120/barrel earlier this year.
It is also worth noting that the transitory inflation was largely about durable goods, ones which have a long period between purchases e.g. cars, appliances, furniture etc., and for this category the measure peaked at 18.7% in February, but was already down to 2.4% by November - one of the most dramatic disinflations on record. Inflation may have peaked later in Europe and UK due to the acute impact of energy prices, but the global signs of respite are there.
3. Interest rates to top out in early 2023
Due to the return of double-digit inflation, this year marked a swift and seismic change in the monetary environment as policy makers grappled with higher levels.
The US Federal Reserve raised its target rate by 425bps in 2022. Putting this in historical context, in any calendar year the Fed has only twice hiked rates more than it did in 2022 – 538bps in 1973 and 450bps in 1980.
The Bank of England and ECB have moved by 325 bps, to 3.5%, and 250bps to 2.5% respectively (main refinancing rate). Even the Bank of Japan surprised markets this month with a policy tweak that will allow rates to fluctuate 50bps from its 0% target instead of 25bps.
We are now entering a new phase of rate setting where hikes will become smaller in magnitude. Australia and Canada started this in October and others joined ranks in December. There is the broad expectation that rates will peak in the first half of 2023. Consensus among forecasters and markets is that they will reach 5% in the US, 4.5% in the UK and 3% across the euro area.
Unsurprisingly, all this has brought the affordability of residential property to the fore and prices are being tested by the regime change. By way of example, the average mortgage payment, between January and November, rose 59% in the UK and 48% in the US just based on interest rate changes alone.
With many predicting that economic slowdowns will encourage central banks to rate cuts from Q4 2023, this could offer some respite for the sector. The timing and magnitude of the peak for this rate hiking cycle remains at the mercy of inflation and is a key risk for housing markets and investors.
4. Unemployment to rise, but only marginally
One positive is that many economies are starting this new cycle with a relatively strong employment market.
Across the G7 economies the average unemployment rate was 5% using latest statistics, down from almost 6% a year ago.
Although the headline rate is likely to tick up in many economies as growth slows, or indeed they endure a recession, there is not expected to be a dramatic rise in the number of jobless people. The consensus is that the rate will rise from an average of 5% in 2022 to 5.6% in 2023 and 5.7% in 2024.
This, combined with, on average, somewhat more savings in bank accounts than prior to the pandemic, indicates that the economic downturn could be shorter and shallower than previous cycles – a positive for residential markets.
5. Currency – US dollar to lose some ground
The US dollar has started to see some of the strength it gathered in 2022 wane. At its peak, in early November, the dollar’s yearly gains were more than 10% against a basket of currencies. This came off the back of the Federal Reserve’s earlier rate hiking as well as the currency’s safe haven status. Only two currencies have strengthened against the greenback in 2022 – the Brazilian real and the Russian ruble.
However, as policy starts to shift the dollar has begun to fall back and this slide is likely to continue into 2023. With November’s better-than-anticipated inflation read the dollar lost 1%.
The yen bounced on the back of the Bank of Japan’s shock move to tweak its rate-setting policy earlier this month – it had previously been down more than 20%. The pound by way of example has bounced back from lows of $1.04, albeit this was a shock and short-lived, in September to $1.22 at time of writing – still below the $1.35 at the outset of 2022.
Whilst dollar-denominated and linked currency-denominated buyers have had a purchasing power advantage in 2022, we could see this start to reverse slightly in 2023.
Photo by Tima Miroshnichenko