CENTRAL BANKS ARE HOPING A COOLING PROPERTY MARKET WILL HELP TACKLE INFLATION

CENTRAL BANKS ARE HOPING A COOLING PROPERTY MARKET WILL HELP TACKLE INFLATION

This week saw further evidence that the global housing market is beginning to cool. New mortgage approvals and home completions are falling in the US. UK mortgage applications are also falling and estate agents have reported a drop in buyers. The rising cost of living has been blamed but this is also due to central bank action. Central banks know that a rate hike quickly transfers through to new mortgage costs. Housing costs make up a major element of current inflation and so many central bankers will be happy to use the housing market as a way of moderating inflation.

Elsewhere, the outlook turned a bit more gloomy as the World Bank and OECD cut forecasts for global economic growth. The OECD said the outlook for the UK is particularly poor as it expects the rising cost of living, tax hikes and higher interest rates to dampen consumer demand and result in zero growth in 2023. In an effort to regain some momentum after his bruising no confidence vote, Boris Johnson turned to the housing market for a boost and he appears to be hoping that the threat of stagflation can be averted with the sale of a few housing association homes.

GLOBAL: GDP PREDICTED TO SLOW AS INFLATION PERSISTS

The World Bank and the OECD slashed their forecasts for global GDP growth, blaming the Russian invasion of Ukraine for the worsening outlook. The World Bank reduced its forecast to 2.9% growth this year and warned that central bank interest rate hikes are increasing the risk of a broad debt crisis as middle and low-income countries deal with higher debt servicing costs. The OECD expects European countries to experience more severe disruption from the Russian invasion as the refugee crisis and higher energy costs take their toll. It expects growth to weaken further to 2.8% in 2023 and expects the UK to see a particularly sharp slowdown with zero GDP growth next year.

The World Bank expects inflation to peak later this year and return below 3% in 2023, however, the OECD is not so optimistic and expects inflation of around 6% for the G20 in 2023. Separately the European Central Bank has cleared the way for a first hike in interest rates since 2011 as it announced its bond purchase programme will end next month.

CHINA: EQUITY MARKET RECOVERS AS REGULATORY CLIMATE IMPROVES

Chinese equities have continued their recent recovery as some stringent Covid restrictions are lifted and the government begins to deliver on its promise to relax its scrutiny of some businesses. The MSCI China index has risen around 27% since it its recent low in mid-March and positive sentiment was boosted this week as several tech platform businesses, including ride hailing app Didi Chuxing, received government approval to sign up new customers again. Chinese tech companies still have a long way to recover as government intervention has wiped as much as 90% off some shares since last year.

The World Bank and OECD predict growth of around 4.5 to 5% this year and next – considerably below the long term average of 6.8%. China’s exports were much higher than expected in May, however, the property market remains mired in problems and the news that China has created a financial stability fund to try and prevent contagion if a big bank or insurance company collapses suggests there may be further bumps in the road.

HOUSING: JOHNSON OFFERS HELP TO BUYERS AS MARKET STARTS TO COOL

Boris Johnson tried to regain some of the initiative after Monday’s no confidence vote by including plans to boost the property market as part of proposals to help the economy and provide further assistance with the rising cost of living. The plans will extend the right to buy to housing association tenants as well as allow those on universal credit to use their benefits to pay towards a mortgage. They also include a commitment to build new homes to ensure a one-for-one replacement for each home sold.

House prices have continued to rise sharply this year but estate agents have reported a drop in buyer numbers and say the number of sellers is also reducing. The Royal Institute of Chartered Surveyors said rising mortgage costs and the rising cost of living is starting to slightly reduce buying activity but it expects demand to continue to fall this year. Figures from the Bank of England last week showed that mortgage approvals have fallen to their lowest since June 2020 but, with fewer homes for sale, the RICS expects prices to hold up.