The US economy looms over European housing markets
Making sense of the latest trends in property and economics from around the globe
5 minutes to read
A clever person once said that an event that happens once is down to chance, twice is a coincidence, three times is a trend.
The saying explains why investors were so rattled on Wednesday by a third set of US inflation data suggesting that prices continue to rise at an annual rate of more than 3% and don't appear to be slowing. I talked on Wednesday about fears among European central bankers that cutting interest rates before the Federal Reserve risks importing inflation via weakened currencies. There's going to be a lot of talk over the next eight weeks about who is 'Fed-dependent' and who isn't.
Sweden provides a good example of the bind some economies find themselves in. The annual rate of inflation in the Nordic nation is at a two-and-a-half year low and is falling rapidly. Economic growth is likely to be the slowest in the G-10 this year and unemployment is rising. House prices are down nearly 15% since the peak in spring 2022, depending on which gauge you look at. Conditions are ripe for a rate cut next month, but the Riksbank has long-running concerns about the weakness of the krona.
"The threat to being able to lower the interest rate in May will come primarily from postponements of the interest rate reduction plans at other central banks," Riksbank deputy governor Per Jansson said yesterday. "It risks weakening the krona, which in turn can push inflation up again in the future, in the worst case in a serious way."
Ripples
“We are not Fed-dependent,” European Central Bank president Christine Lagarde told reporters in Frankfurt yesterday. She spoke after the Governing Council opted to hold the key interest rate at 4% for the fifth straight meeting and continued to signal that June presents the most likely date for the first cut.
Analysts polled by Bloomberg expect three cuts this year - in June, September and in December.
In the UK, traders are no longer fully pricing in the first rate cut in August and now expect borrowing costs to begin easing in either that month or September. Markets expect two cuts this year, which is down from six as recently as January, the FT reminds us.
The paper is first out of the blocks with a story on how bleak the changed outlook is for the Conservative Party, which had hoped that the base rate would begin falling well before an autumn election. Events in the US this week are "concerning" and may impact Office for Budget Responsibility assessments of the public finances, Conservative officials told FT reporters.
The housing market
The impact of all this on the UK housing market is likely to be pretty muted. Back in January it looked like six cuts to the base rate would enable mortgage rates to tumble, but those hopes dissipated around late-February when narrative began to change and mortgage rates plateaued.
The recovery has nevertheless continued, but it hasn't been quite as strong as looked likely three months ago. We expect these positive, albeit a little sluggish, conditions to continue until rate cuts appear more clearly on the horizon.
Lenders responding to a Bank of England survey, published yesterday, said demand for mortgages returned to growth in the first quarter following two quarterly contractions. They expect another strong uptick in demand through the second quarter.
The recovery is “still on track” despite the fact that some lenders notched up mortgage rates in response to hotter inflation figures, Simon Gammon of Knight Frank Finance told the FT. “Many people put off moving while the economic outlook was so uncertain but there’s a real sense now that buyers want to move on.”
A seasonal bounce
The RICS Residential Market Survey for March, out yesterday, confirmed that buyer demand continues to rise and surveys expect activity to gain further traction over the coming months. The survey's measure of house prices suggests values are stable, with forward-looking metrics suggesting that an upward trend may emerge later in the year.
A net balance of +8% of respondents reported an increase in new buyer enquiries during March - anything above zero represents an expansion. That's up from a reading of +4% last month and marks the third consecutive month in which this measure has been above zero. The March figure represents the most positive return for the demand series since February 2022.
Supply continues to improve. The flow of new listings increased for a fourth successive report. The number of appraisals showed a solid rise for the third consecutive month.
“There will be a seasonal bounce in the UK housing market this spring, it just won’t be as strong as the one expected in January," says Knight Frank's Tom Bill. "While falling headline inflation and mortgage rates sparked a ten-week recovery that ran into the early weeks of this year, the housing market has drifted for the last ten weeks due to stubborn underlying inflation and the fact mortgage rates have crept higher. The rising cost of borrowing, the increase in supply and the fact a wave of borrowers are rolling off sub-2% mortgages from early 2022 mean house prices are currently moving sideways. We expect inflation to slowly come under control and more sub-4% mortgages to appear later this year, meaning UK prices should increase by 3% in 2024.”
In other news...
Where to park your superyacht (FT), forget boomers vs millennials, the next conflict is millennials vs each other (FT), and finally, the world risks ‘tepid Twenties’ as debt levels and inflation soar, warns IMF (Telegraph).