1 year ago
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Key events
Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, says UK house prices have further to fall.
We still think house prices will not find a floor until they have fallen by about 8% from their peak. Households’ real disposable incomes will fall further over the next couple of quarters, as the government reduces its energy bills support, and as firms push through job cuts in the face of surging borrowing costs.
Meanwhile, mortgage rates are over three times higher than at the start of 2022, despite falling from October’s peaks, and look set to fall only slowly this year, ensuring that mortgage approvals remain near Q4’s rock bottom level. Demand also will be constrained by lenders’ affordability tests, which are based off Bank Rate. Many potential buyers also will wait until prices have fallen substantially.
The MPC [monetary policy committee], however, should have some scope to reduce Bank Rate next year, once slack has emerged in the labour market. In addition, the recent sharp fall in wholesale energy prices suggests that real incomes will recover in the second half of the year. As a result, we revised up last week our forecast for the subsequent recovery in house prices over the course of 2024, to 5.0%, from 3.7%.
Introduction: UK house price growth slows to lowest rate since mid-2020; all eyes on Fed decision
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
The year has begun with further slowing in UK house price growth.
Annual house price growth slowed to 1.1% in January from 2.8% in December, the lowest rate since June 2020, said Nationwide building society.
Property values fell 0.6% in January from December, following a 0.3% drop in December, marking the fifth monthly decline in a row and the longest string of declines since the financial crisis in 2009. Annual price growth slowed to 1.1% from 2.8%.
The average home is now worth £258,297, down from £262,068 a month ago, and prices are 3.25 lower than their August peak.
Robert Gardner, Nationwide’s chief economist, said:
However, there are some encouraging signs that mortgage rates are normalising, but it is too early to tell whether activity in the housing market has started to recover. The fall in house purchase approvals in December reported by the Bank of England largely reflects the sharp decline in mortgage applications following the mini-Budget.
“It will be hard for the market to regain much momentum in the near term as economic headwinds are set to remain strong, with real earnings likely to fall further and the labour market widely projected to weaken as the economy shrinks.
“As we highlighted in our recent affordability report, the biggest change in terms of housing affordability for potential buyers over the last year has been the rise in the cost of servicing the typical mortgage as a result of the increase in mortgage rates.
The main event today is the US Federal Reserve’s meeting. America’s central bank is expected to raise interest rates by 25 basis points to 4.75%, a more modest hike than in previous months, but the question is whether it will then pause for breath.
Markets assume that the Fed will start cutting rates before the end of the year, as inflation slows. Fed chair Jerome Powell’s press conference following the decision should give some clues as to the Fed’s thinking.
Michael Hewson, chief market analyst at CMC Markets UK, said:
It is this disconnect between the Fed’s rhetoric and what the market is pricing which makes today’s FOMC rate decision and Powell press conference very much a “live” meeting.
How does Powell square how the Fed sees the path of future rate rises and the markets’ belief that the central bank will start cutting rates again before the year is out.
While Fed officials have insisted that rates will stay high for some time to come, the markets simply don’t believe them, especially when several key inflation indicators have shown that prices are still coming down on a steady trajectory.
This is what makes today’s Powell press conference such a tricky proposition when it comes to market positioning. The danger for the Fed is in allowing the market to continue to think that rates are likely to come down this year, which in turn could see inflation take off again, especially with the labour market being as tight as it is. Powell simply can’t afford for financial conditions to loosen and for the inflation genie to get out of the bottle again.
The Agenda
9am GMT: Eurozone S&P Global Manufacturing PMI final for January (forecast: 48.8)
9.30am GMT: UK S&P Global/CIPS Manufacturing PMI final for January (forecast 46.7)
10am GMT: Eurozone Inflation flash for January (forecast: 9%, previous: 9.2%)
10am GMT: Italy Inflation for January (forecast: 10.1%, previous: 11.6%0
1.15pm GMT: US ADP Employment change for January (forecast: 178,000)
2.45pm GMT: US S&P lobal Manufacturing PMI final for January (previous: 46.2)
3pm GMT: US ISM Manufacturing PMI for January (forecast: 48, previous: 48.4)
7pm GMT: US Federal Reserve interest rate decision (forecast: 25bps rise to 4.75%)
English (US)