Spring arrives for the housing market

Spring arrives for the housing market

The UK economy has shown unexpected resilience in the face of rising interest rates and inflation. Agreed, the economy fell into a recession in the second half of last year, but so far, a very mild one. The high unemployment, financial stress and big company corporate failures that looked possible a couple of years ago have not materialised. The housing market has also held up, confounding expectations of sharply lower house prices.

• The last time I wrote about house prices was in November 2022, in the aftermath of Kwasi Kwarteng’s ill-fated mini-budget. At that time I forecast a 15% decline in house prices. Large though such a fall seemed, house prices had risen by 25% in the previous three years and by 250% since 2000. Against that backdrop, a 15% decline seemed pretty modest. Still, my forecast proved too pessimistic. Between November 2022 and last autumn house prices fell by about 5%, since when prices have started to edge up.

• So how can we explain the resilience of house prices in the face of interest rates increases and stagnating activity?

• The reversal of Mr Kwarteng’s mini-budget by his successor, Jeremy Hunt, contributed to a sharp reduction in mortgage rates from late 2022. Most households have fixed-rate mortgages which, unlike the variable-rate deals that were the norm until the 2000s, delay and spread out the impact of rising interest rates on mortgage payments. So far only about half of the total impact of the increase in base rates from 0.15% to today's 5.25% has fed through to mortgage payers. This has softened the impact of rate rises on the housing market.

• More stringent regulation of mortgage lenders since the financial crisis means that they – and borrowers – are better placed to cope with higher mortgage rates. Mortgage terms, including loan-to-value ratio, have been tightened since 2009, with some products, including mortgages where no proof of income is required, have been banned. These measures have raised the quality of mortgage lending and kept mortgage arrears down. Low levels of housing repossessions speak to the resilience of the wider market and to the reluctance of lenders to repossess properties without having exhausted other options. 

• An unusual feature of this cycle was that households entered the downturn with high levels of savings built up in the pandemic. Consumers have drawn down on these savings to support spending over the last 18 months. Unemployment has stayed lower than expected, while wage growth has proved stronger. Since the pandemic over 600,000 people of working age have left the labour market through early retirement and due to sickness and disability. This is a major loss of workers and one that has not been seen in other countries. Employers have also proved reluctant to shed labour, partly it seems, on concerns that it may be hard to rehire in future. Reduced labour supply and unusually buoyant labour demand have helped keep unemployment low, indeed, in the second half of last year the unemployment rate fell even as growth ground to a halt.

• The latest data suggest that UK housing activity is starting to stir. Chartered surveyors report more properties are coming onto the market, growing interest from new buyers and, since August, higher sales. The picture on prices is mixed. The Halifax and Nationwide, whose data reflect mortgage approvals from their own customers, show UK house prices edging up since last October. Less timely data from the Land Registry, which covers all transactions, including cash purchases, suggest prices have fallen slightly since October. The Office for National Statistics, however, cautions that these data may well see material revisions.

• As an aside, the decline in house prices that hit advanced economies may be drawing to a close. The Financial Times analysis of OECD data shows that across 37 industrialised OECD countries, house prices rose 2.1% in the third quarter of 2023 compared with the previous three months, up from near stagnation at the start of last year.

• The UK housing market faces two sets of opposing forces this year. On the one hand, unemployment is likely to drift higher and growth is set to remain weak in the coming months. The feed-through of higher interest rates to existing mortgages has further to run (although the burden is being spread; rather more mortgages are due to reset next year or later this year).

• On the other hand, lower inflation is boosting consumer spending power, consumer confidence is off its lows and financial markets believe that the Bank of England will start cutting interest rates this summer. On the demand side, higher rents bolster the investment case for buy-to-let purchases (on one measure rental costs for those taking a new tenancy have risen by around one-third since 2020).

• The balance of opinion among economists remains negative. Economists surveyed by the Treasury in February forecast an average decline in UK house prices of 1.5% this year. I think this probably underestimates the positive forces at work and would expect low single-digit increases in house prices this year. I will avoid tempting fate by putting a number to it.

• PS: While I am owning up to errors here’s another one. Last week’s Monday Briefing concluded by saying that investors’ appetite for investing overseas was alive and well and, in demonstration of this claim, I wrote that investors spent $1.3bn on foreign acquisitions and greenfield developments in 2023. My colleague Andrew Gray, a partner in our risk advisory practice, spotted the error. I was out by a factor of 1000. The correct figure for worldwide inward investment last year is $1.3tn.  

• PPS: Recently, I joined Rt Hon Caroline Flint, former MP and a minister in the Blair-Brown Labour government, in a Deloitte Green Room podcast to discuss “Do elections change anything?”. You can listen to the episode here: https://www2.deloitte.com/uk/en/pages/about-deloitte-uk/articles/the-green-room-podcast-episode.html?episode=65

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 0.3% at 7,683. 

Economics

• India retained its title as the world's fastest-growing major economy as it expanded 8.4% in the last three months of 2023, from a year earlier
• US-Chinese trade fell by 17% last year, an outcome that Katherine Tai, America’s top trade official said, "isn't necessarily negative. It could be a positive indication of diversification on both sides."
• Press reports suggest that UK chancellor Jeremy Hunt is considering cuts to personal taxation funded in part by changes to ‘non-dom’ rules that can be used by UK residents to avoid tax on foreign earnings. The policy had been suggested by the opposition Labour Party
• The UK government announced that OECD chief economist Clare Lombardelli will succeed Ben Broadbent as deputy governor of the Bank of England
• A report by the Resolution Foundation found that British people in their early 20s were more likely to not be working due to poor health than those in their early 40s, a reversal of a longstanding trend
• Undersea cables in the Red Sea that connect Europe to India have reportedly been damaged, highlighting the vulnerability of submarine infrastructure. Houthi rebels had previously threatened to attack the cables
• The US Core Personal Consumption Expenditure Price Index, the Fed’s preferred gauge of inflation, fell to 2.8% in January, supporting the case for rate cuts later in the year
• Euro area inflation fell to 2.6% in the 12 months to February, a less-than-expected fall from 2.8% last month
• The number of births in Japan fell to a record low of 758,631 last year
• The price of bitcoin reached record highs in a number of currencies and exceeded $63,000, still some way off the all-time dollar high of $69,000 

Business

• More than a third of UK firms surveyed by the British Chambers of Commerce said that they had been affected by disruption to shipping in the Red Sea
• The UK competition regulator opened an investigation into eight major housebuilders, who it suspects may have shared sensitive information
• CEO of the London Stock Exchange Group David Schwimmer said that UK executive pay needed to rise if London wanted to attract world-class companies and talent
• The UK government announced that it would bring forward plans to create a football regulator before the forthcoming general election
• International Airlines Group, owner of British Airways and Iberia, announced record profits of €3.5bn for 2023, driven by strong demand from leisure travellers
• Startup Figure AI announced that it had raised $675m in a funding round that values the company at $2.6bn. The business aims to “bring humanoid robots into commercial operations as soon as possible”
• Tesla CEO Elon Musk is suing ChatGPT developer OpenAI and its CEO Sam Altman, alleging that it has strayed from its non-profit roots in its alliance with Microsoft
• An investigation by the Austrian Standard, The Insider, Spiegel and ZDF found that disgraced former Wirecard executive Jan Marsalek was recruited by Russian intelligence in 2014, long before Wirecard’s collapse in 2020
• Apple has reportedly told staff it is shelving plans to build a self-driving electric car and reallocating many of the staff on the project to work on AI
• Chinese fashion company Shein is reportedly considering switching its IPO to London should its US listing not be approved by regulators

Global and political developments

• Russian president Vladimir Putin said that the deployment of NATO troops in Ukraine risked a nuclear conflict following comments by French president Emmanuel Macron that sending Western ground troops to Ukraine could not be ruled out
• The head of the German air force used an unencrypted video conference software to discuss sensitive military secrets including the use of British “people on the ground” who would be able to help Germany deploy cruise missiles to Ukraine. Russia is reported to have intercepted the talks in a security breach which Olaf Scholz, the German chancellor, described as “very serious”
• The Australian intelligence agency revealed that an unnamed former politician “sold out” the country to an unnamed foreign power
• The US Supreme Court agreed to hear an appeal from former president Donald Trump on whether he has immunity from prosecution over any criminal acts while in office. Democrats criticised the conservative-majority court’s decision as the development means that any trial is now unlikely before the November elections
• Veteran politician George Galloway won the Rochdale by-election following a campaign that was critical of Conservative and Labour policy on Israel
• Thousands of mourners attended the funeral of Russian opposition politician Alexei Navalny in Moscow
• A Russian rocket launched an Iranian satellite into orbit, highlighting the close relationship between the two states

And finally… according to a poll by Delta Dental, a US child receives on average $6 from the tooth fairy for each visit. But according to Mark Burhenne, a former dentist interviewed by The Wall Street Journal, some children receive "a video game…or an iPhone", which he attributes to parents competing with each other - incisor envy