Housing hits the buffers

Housing hits the buffers

After vertiginous growth over the last few years house price inflation has all but ground to a halt, with the Nationwide and Halifax estimating that UK house prices fell between August and October. With the UK almost certainly now in a recession the pressure on the housing market is set to mount.

• Housing market activity has fallen abruptly since the summer. The Royal Institution of Chartered Surveyors reports that new buyer interest has dropped to levels that were last seen at the height of the pandemic lockdown and, previously, in 2008. In the US, where mortgage rates have jumped to over 7.0%, activity has slumped and the price of timber – a key input to new-build houses in the US – has fallen by two-thirds since March’s peak.

• In downturns homeowners tend to stay put if they can, rather than accept a lower price to move. Thus house prices are ‘stickier’ in a downturn than housing activity. In the last big housing downturn, in the financial crisis, housing transactions fell by 66% compared to a 19% decline in house prices.

• Falling real incomes and higher mortgage rates speak to a period of depressed housing activity and falling house prices. We see UK house prices declining by about 15% from peak to trough in this downturn. After years of growth this looks like a large adjustment. Yet it would only return UK house prices to where they were in October 2020 – and is far less than the 25% rise in prices seen in the last three years.

• The pressures on households are obvious. The Bank of England’s latest forecasts, published last week, show real, post-tax incomes falling this year and next and unemployment rising into 2025. In the five years to January rates on two-year and five-year mortgages had averaged 1.8%-2.5%. In September, at the height of the turmoil in the UK bond market, these rates have more than doubled. Market interest rates have since fallen back with the cancellation of the previous government’s mini-budget, but higher mortgage rates are here to stay.

• 1.2m households on variable-rate mortgages have already felt the effects of interest rate rises. 6m households are on fixed-rate mortgages which, as they come to an end, will have to be refinanced at higher rates. The Resolution Foundation estimates that by the end of 2024 more than 5m households, or one-fifth of all households, will be paying more.

• Yet even in two years’ time this will still leave 2.2m households on fixed deals with unchanged rates. This illustrates an important change in the housing market since the recession of the early 1990s. Then virtually all mortgages were at variable rates. Today about 85% of all mortgages are fixed (far higher for recent homebuyers) meaning that rising rates affect households more slowly than in the past.

• This is not the only difference to the situation in the 1990s. Standards for mortgage lending have been tightened significantly since the financial crisis. There are fewer interest-only mortgages, self-certification mortgages are a thing of the past and deposit levels are generally higher. A lower expected peak in unemployment than in the early 1990s should also help prevent the kind of rise in housing repossessions seen 30 years ago. Finally, it also seems likely that, as happened during the pandemic, banks and regulators will seek to help those who are struggling with mortgage bills, possibly by extending terms or deferring payments.

• A period of falling house prices and rising wages helps make housing more affordable. But given the scale of the increase in house prices since 2000 – up 250% against a 100% increase in wages – a 15% fall in house prices is fairly modest. Moreover, the benefit to new buyers of lower prices could easily be offset by higher mortgage rates or a dearth of supply as prospective sellers sit tight. A more material improvement in affordability would require a sharper fall in house prices or a prolonged period in which wages outpace house prices.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 0.8% at 7,318. UK equities gave up the gains that followed the announcement of lower US inflation following news that the UK economy contracted in the third quarter

 Economics

• US inflation rose at a slower than expected rate of 7.7% in the year to October, the slowest pace since January. Equity markets rallied on the news and market expectations for future interest rate rises eased
• The UK economy shrank by 0.2% in the third quarter, probably marking the start of a recession which the Bank of England expects to last through next year and into 2024
• The UK chancellor Jeremy Hunt warned that everyone will pay more taxes after this week’s Autumn Statement and that he is preparing significant cuts to public spending
• The share of UK households struggling with living costs doubled in the year to November as annual grocery inflation hits 15%, according to Kantar
• The European Commission has forecast that a drop in German output will help drag the EU into recession this winter
• European Central Bank officials signalled that interest rates are set to increase further despite the dampening effects on growth
• Goldman Sachs cut its forecast for US corporate earnings in the light of weaker than expected profits seen in Q3 2022
• Chinese exports fell in October on weaker global demand and COVID lockdowns in China
• Guangzhou, a key manufacturing hub, extended COVID-19 restrictions following an outbreak
• The wealth of China’s 100 richest people fell by more than a third in 2022 as the country’s zero COVID-19 policy weighs on companies’ valuations
• Western sanctions have led to a 24% reduction in Russian imports, according to the Kiel Institute

Business

• Cryptocurrency markets slid last week as the crypto exchange FTX filed for bankruptcy after talks of a bailout by Binance failed
• WH Smith returned to profit in the third quarter as a result of the recovery in tourism, which doubled the group’s travel revenues
• The energy group Centrica launched a share buyback scheme as energy prices drove company profits up by 50% in the six months to October
• Provider of coworking spaces WeWork announced office closures to reduce costs as the group struggled to turn a profit since its IPO
• Deutsche Post DHL raises its 2022 profits outlook as “revenue and profits again increased significantly due to ongoing high freight rates”
• Ride-sharing service Lyft announced that it would cut 13% of its workforce citing recessionary pressures and increases in rideshare insurance costs. Meta, Twitter, Microsoft and Amazon have all announced job cuts recently
• The ECB and UniCredit clashed as the Italian bank decided to pay out dividends despite Europe’s gloomy outlook and its decision to continue operations in Russia
• The European Commission announced that it would probe Microsoft’s acquisition of Activision Blizzard on competition grounds

Global and political developments

• US president Joe Biden signalled his intention to seek re-election in 2024, as the Democratic Party beat expectations
• Sir Gavin Williamson, a key figure in the UK prime minister Rishi Sunak’s leadership campaign, resigned over bullying allegations
• Russian forces retreated from Kherson in southern Ukraine
• Ukraine announced it has received its first NASAMS air defence system from the US
• Russia’s president Vladimir Putin will not attend the G20 summit in Bali, according to an Indonesian official
• Turkey agreed to partially pay for Russian gas in roubles to ease trade tensions after the EU and the US warned against such a move
• The World Meteorological Organization warned that the last eight years are on track to be the warmest on record as the impact of climate change is already being felt

And finally… the US National Park Service asked visitors to refrain from licking the Sonoran Desert toad found in its parks for its psychedelic properties – toad trip