Global economic uncertainty weighs on markets

Home values around the world rose broadly in the second quarter of 2019, though at a slower place than at any point in the past decade, according to an index released Wednesday from Knight Frank.

Average home prices across 56 countries increased by a modest 3.4 per cent in the second quarter compared to a year ago, according to the global real estate firm, which tracks data published by Central Banks and other government sources. Even though all but four markets saw some level of housing appreciation, slower growth shows that fears of an impending global economic slowdown have begun to weigh on housing markets.

China led the index in the second quarter, with home values rising by 10.9per cent, well below the usual white-hot growth of top performing markets that typically top the index. It was the slowest annual growth for the top performers since the first quarter of 2009, amid the fallout from the last global recession.

Malta trailed close behind with home prices rising 10.8 per cent during the same timeframe. The Czech Republic was third with home prices rising 9.4per cent in the year through June. But the majority of countries included in the index saw home values grow five per cent or less, amid changing economic conditions. Trade wars between the U.S. and China, political protests in Hong Kong and weakening economic sentiment have combined to squelch demand in a number of important housing markets, according to the report.

Home prices were virtually flat in the U.K. (up 0.9per cent), as the looming Brexit creates a climate of economic and political uncertainty there. The U.S. housing market has also cooled to some extent with home values rising 3.1per cent compared to a year ago.

“Headwinds are mounting and weighing on buyer sentiment despite a raft of interest rate cuts in the last three months,” according to the report. Though there is hope the interest rate cuts will stimulate more home buying and thereby lead to higher price growth in countries like Australia, which sat at the bottom of Knight Frank’s housing index. Average home values in the country down under slipped 7.4per cent in the year through June. The only other countries to record negative price growth were Finland, politically embattled Italy, and Morocco.

In a related development there has been a renewed deterioration in residential property sales expectations in the United Kingdom over the near term, with Brexit uncertainty being a significant factor, the latest market survey shows.The Royal Institute of Chartered Surveyors (RICS) is predicting a further decline in activity over the three months to come in its August report, as both buyers and sellers remain hesitant.

Near term sales expectations fell from a net balance of -4 per cent to -23per cent, representing the poorest return since February this year. Furthermore, sales expectations have weakened in almost all parts of the UK over the past two months. Things are expected to improve, albeit only very modestly, RICS adds, over a 12 month period.As positivity has leaked out of the market, August also saw flat demand from new buyers, after a couple of months where enquiries from potential purchasers had increased somewhat.

The Newly Agreed Sales series inched slightly further into negative territory on a UK wide basis to a net balance -8% compared to -6% previously. Within this, a slightly more upbeat picture was in Wales and the North East of England.

Meanwhile, new instructions to sell were flat once again in August, marking the third consecutive report in which the volume of fresh listings coming onto the market has seen little change.The downcast trends over the past month have ensured price pressures remain unchanged across the country as a whole. The headline RICS Price net balance came in at -4per cent in August, suggesting house prices were largely unchanged.

In the near term, prices are expected to fall at the national level, with a net balance of -24per cent of survey participants anticipating a decline over the coming three months, down from -13per cent previously. Nevertheless, at the 12-month time horizon, a net balance of +12per cent of respondents project prices will increase.

In the lettings market, the August results show tenant demand increased for an eighth month in succession, as a net balance of +23per cent of contributors cited a pick-up. Set against this, landlord instructions remain in decline, an ongoing trend stretching all the way back to 2016. Given the consistent imbalance between rising demand and falling supply, rents are seen being squeezed higher over the next three months.

“It is hard to get away from the shadow being cast over the housing market by the seemingly never-ending Brexit saga. Indeed, uncertainty is a theme that respondents continue to highlight as a negative influence on sentiment in survey after survey,” said Simon Rubinsohn, RICS chief economist.
“That said, the key RICS activity indicators have actually remained relatively resilient until now pointing to only a modest dip in transactions across the country rather than anything more severe,” he explained.

“More ominously, the August RICS results again draw attention to the challenge in the lettings market, with feedback continuing to indicate that demand is outstripping supply. As a result, the pressure is for rents to continue moving higher and indeed outstripping any price gains both in the near and medium term,’ he added.

Meanwhile, Hew Edgar, RICS head of UK Government relations and City, pointed out that the ever changing policy landscape is damaging confidence in the lettings market. ‘But the Private Rented Sector (PRS) has the enormous potential to deliver more homes that are urgently needed, and to contribute to the alleviation of the affordability issues which are being exacerbated by the ongoing dearth of supply across all tenures,’ he said.

“The need for the regulation of property agents, including those operating in the PRS, is critical in order to make the sector more attractive to landlords, and of equal importance, enhance the landlord tenant relationship,” he explained.

“To assist this recommended regulation, we are working with industry to develop an approved PRS Code of Practice. We have also worked with Lord Best as part of his Regulation of Property Agents (ROPA) working group, to help bring positive change and increase public confidence in the sector, parts of which have been likened to the Wild West,[‘ he added.

Jeremy Leaf, north London estate agent and a former RICS residential chairman, said the figures are disappointing bearing in mind their historic accuracy. ‘But they are not a lot different from what one would expect in August, particularly in view of continuing political uncertainty,’ he pointed out.

‘On the ground, we have seen plenty of caution and many buyers and sellers sitting on their hands. However, longer term buyers of smaller houses have been looking beyond Brexit and taking on view on likely price movements,’ he explained.‘Other recent market surveys bear out this trend, in other words, the market is showing more resilience than we might have dared hope. Certainly, we are not finding buyers and sellers withdrawing from transactions because of worries about an imminent market correction,’ he added.

According to Kevin Roberts, director of the Legal & General Mortgage Club, political uncertainty may be dominating the headlines, but the mortgage market is upbeat. ‘The sector remains strong and resilient. Innovation from lenders, competitive mortgage rates and the ongoing support of Government schemes like Shared Ownership are helping more buyers, from first-timers to those looking to remortgage,’ he said.‘For a great many of these borrowers, advisers have played a critical role in their mortgage journey. There are thousands of options now available to buyers across the country,’ he added.