Inflation, interest rates and new forecasts
Making sense of the latest trends in property and economics from around the globe.
4 minutes to read
Resilience
The housing market started 2023 in much better shape than looked likely at the back end of last year, as we've discussed in recent notes. We got more evidence of resilience yesterday via the Halifax House Price Index, which revealed that UK house prices remained largely stable during the three months through February.
"Recent reductions in mortgage rates, improving consumer confidence, and a continuing resilience in the labour market are arguably helping to stabilise prices following the falls seen in November and December," says Kim Kinnaird, a director at Halifax Mortgages.
Granted, the data is noisy at the moment. Last week Nationwide reported an annual decline in UK house prices of 1.1%, the largest fall in a decade. However, most forward looking indicators are surprising on the upside.
Updated forecasts
Against this inconsistent backdrop, we have updated our five-year UK housing market forecasts.
We still expect UK house prices to decline by around 10% over the next two years as the impact of higher mortgage rates takes its toll on affordability. However, we expect any weakness to be shorter-lived and now forecast a 4% rise in 2025 (see table). That's up from the 2% increase we predicted in October - back when five-year fixed-rate mortgages were above 6%.
Should the solid start to the year continue into the spring, a shallower overall decline would become a more realistic possibility and we will review our forecasts again before the summer.
Current figures certainly suggest that market activity will remain robust. The number of new prospective buyers registering in the UK was 10% above the five-year average in February.
Unanticipated hikes
Inflation and the path of interest rates remain the big unknowns and events in the US over the past month illustrate the degree to which conditions can shift in just a few weeks. A steady stream of hot data spanning the labour market and consumer demand took the Federal Reserve by surprise, opening the door to another half-a-point hike at the next meeting in late March.
"The ultimate level of interest rates is likely to be higher than previously anticipated," Fed chair Jerome Powell told the Senate banking committee yesterday.
Forecasters from Blackrock, Schroders and Goldman Sachs issued notes contemplating the prospect of peak rates at 5.75% - 6%, roughly amounting to an additional 50 basis points of unanticipated hikes.
Similarly, inflation figures from the euro zone released last week surprised on the upside and a half-a-point hike on March 16 looks almost certain.
A cooling jobs market
The undulations of US peak rate expectations at least in-part explain why Bank of England governor Andrew Bailey has been so non-commital in recent speeches. People parsing his March 1st speech for clues as to what's likely to happen next could be forgiven if they came to different conclusions. Indeed, Bloomberg and Reuters did just that.
There is little doubt, however, that comparable data coming from the UK looks pretty benign in comparison. The Recruitment and Employment Confederation/KPMG monthly permanent placements index showed further signs of cooling in February, with pay growth slowing as companies become increasingly concerned about the economy, for example.
Of course, the jobs market alongside consumer confidence and mortgage rates have underpinned the recent strength of the housing market. Whether they can remain in relative equilibrium as they are at the moment will dictate whether that strength runs through the spring and beyond.
Historic buildings
Historic buildings are built to be draughty. They were designed to allow air and moisture to pass through, thereby preventing build-ups of moisture that threaten components such as timber beams.
It's a feature that has morphed into a bug that needs fixing if the UK is to meet its net zero goals. The UK already faces a considerable skills gap when it comes to upgrading the stock of existing buildings, but historic buildings present a particular challenge. New research from Grosvenor, The Crown Estate, Historic England, the National Trust and Peabody, has identified a need for 205,000 workers to focus solely on retrofitting historic buildings every year from now until 2050 in order to meet the UK’s net zero targets. That's more than double the number of workers that the group estimates currently have the skills.
The rewards of getting grips with the issue could be significant. Retrofitting just half of pre-1919 residential buildings over a 10- year period could lead to carbon savings of 39.6 million tCO2e and an estimated monetary saving of £3.4 billion worth of CO2 reductions by 2050.
The group proposes a range of measures to begin tackling the shortage, spanning a National Retrofit Strategy, the establishment of industry standards that support historic retrofits, plus local skills improvement plans.
In other news...
China’s lowest growth target in decades signals era of caution (FT).