The economics of conflict in the Middle East
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
The heightened risk of a regional war in the Middle East carries significant geopolitical and economic risks, including two immediate concerns for global property markets.
Images of airborne Iranian missiles prompted oil prices to surge more than 5% yesterday. Whether rising oil prices reverse progress in combating inflation, forcing central banks to pause or even begin hiking again, remains possible but looks unlikely. Oil prices have remained subdued since the conflict began almost a year ago amid a glut of supply and weak demand. Even after yesterday's surge, prices are down 11.5% since October 7th, writes Bloomberg's John Authers. That compares to a 233% spike in the 12 months following the Yom Kippur War of 1973.
The second risk is the degree to which global investment sentiment sours. It's harder to draw conclusions here because so much depends on the pace of escalation during the months ahead. Analysts appear relatively sanguine at this stage - see output from Eurasia Group's Ian Bremmer, for example. There were no casualties, and the attack was signaled to the Americans well in advance, he says, while the Biden administration's desire for restraint is likely to remain undimmed.
This time it's different?
A massive stimulus blitz by the Chinese government has been greeted with frenzied trading in local stock markets. The measures announced on Monday included support for institutions trading shares and a raft of targeted property market stimulus, including cuts to borrowing rates, reducing deposit ratios and loosening rules on non-residents purchasing properties in core areas.
Stocks of some defaulted developers have surged more than 200% in the past five days. A Bloomberg Index of Chinese developers is up 92% over the same period. In Hong Kong, the Hang Seng index climbed nearly 7% this morning, putting it on track for its best day since November 2022.
Analysts are skeptical as to whether the measures will be enough to prompt a recovery in mainland property markets: "The recent measures will help stabilise the property market, but lifting prices and reviving demand will be challenging,” JP Morgan analysts led by Chetan Ahya wrote in a note cited by Bloomberg.
China's economic slowdown has weighed down Hong Kong property markets, so the measures may provide an indirect shot in the arm, but it will be a long road to recovery. Home prices in Hong Kong continued their downward trajectory in July, dropping by 1.9% month-on-month, and 4.7% year-to-date, reaching the lowest level in nearly eight years, according to Knight Frank's September Outlook. Values are down almost a quarter since the September 2021 peak.
The UK residential recovery
UK house prices climbed 0.7% in September, Nationwide reported on Monday. That pushed the annual growth rate to 3.2%, the fastest since November 2022. Values are now just 2.2% below the peak in the summer of 2022.
“Falling mortgage rates led to an increase in house price growth in September, with demand also boosted by buyers putting off decisions until after the election," said Knight Frank's Tom Bill. "However, the mood has since turned more cautious ahead of the Budget following suggestions by the government it will be painful."
Indeed, activity is still recovering, but only to a point. Net mortgage approvals for house purchase rose to 64,900 in August, the highest level since August 2022, the Bank of England said on Monday.
"Purchasing activity continued its slow recovery during August but conditions are sluggish given the falls in mortgage rates we've seen," said Simon Gammon of Knight Frank Finance. "Granted, 64,900 approvals for house purchase is well above the 45,400 we saw last year, but we're yet to reach the 66,000 or so monthly approvals we'd come to expect before the pandemic."
In other news...
From our team - Tom Bill on caution in prime country markets, Kate Everett-Allen on why Monaco is in demand, Khadija Hussain on Labour's vision for national renewal and Oliver Knight on why accommodation plays an important role in student decisions.
Elsewhere - London's Canary Wharf sets sights on hotels to fill empty offices (Reuters), UK budget worries weigh on factory activity, PMI shows (Reuters), the house-price supercycle is just getting going (The Economist), Mark Carney warns net zero will mean ‘significant’ stranded property assets (FT), Marquee New York property seeks $3.5bn in test for office real estate (FT), Jay Powell signals Federal Reserve will revert to quarter-point cut in November (FT), L&G’s modular homes losses hit £279m (Times), Eurozone inflation falls below 2 per cent (Times), and finally, New Yorkers start to favour mortgages over cash (Bloomberg).