Has The Housing Market Turned A Corner?

Economic

Summary:

Despite recent strong housing completions, homeowner and rental vacancy rates have hardly budged off their multi-decade lows.

The housing sector was one of the hardest hit areas of the economy when the Fed began raising rates, but there are signs activity has turned a corner.

The “mortgage lock” effect, where households that had locked in low mortgage rates are disincentivized to move and assume higher rates, has severely limited the supply of existing homes for sale in the market, shown on the right-hand chart. This supply is beginning to thaw, with our measure of seasonally adjusted existing homes for sale showing a steady upward trend since last Spring. Some relief should also come from new home supply underway, with 1.6M units currently under construction and housing completions hitting their highest level in 17 years in February. Improved homebuilder sentiment, strong hiring and a chronic undersupply of housing should support strong construction activity in the years ahead.

The demand side has also proven resilient. Despite recent strong housing completions, homeowner and rental vacancy rates have hardly budged off their multi-decade lows. A surprising immigration boom may be contributing to this, raising the bar on housing units needed for population growth, but modest declines in rates have seemed to help stimulate activity and improve home affordability. The 30yr fixed mortgage rate is currently at 6.9%[1], off its peak of 7.8%, and while mortgage rates will remain elevated relative to pre-pandemic levels, Fannie Mae sees further inches down to 6.4% by end-2024 and 6.2% by end-2025. Over the longer term, the recent NAR settlement on realtor commissions may also lower home prices by reducing transaction costs.

For the average household, the “mortgage lock” has been an important layer of immunity to higher rates. The average effective mortgage rate in the economy is at 3.8%, just 0.5% above its historic low in mid-2022. This immunity will gradually fade, but alongside improving real wages and strong balance sheets, consumers should be able to weather incremental exposure. Moreover, while the recovery in housing market activity will be gradual, resilient supply and demand dynamics underscore that it is not a source of vulnerability for the economy. While we don’t expect a recession this year, whenever one occurs, the lack of private sector imbalances suggest that it is unlikely to be a severe one. Has The Housing Market Turned A Corner?_1

Has The Housing Market Turned A Corner?_1

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Economic

China has dethroned the US to become the top alignment choice for Southeast Asians as Washington loses ground on a range of key issues from regional economic engagement to the Israel-Hamas War, according to a new survey.

A survey of 1,994 Southeast Asians by the ISEAS-Yusof Ishak Institute published Tuesday shows China’s popularity in a head-to-head race with the US climbing from 38.9% last year to 50.5% in 2024. Among individual nations, Beijing garnered some three out of four votes in Muslim-majority Malaysia, Indonesia and Brunei.

“Confidence in the US has waned,” the survey states. “This could be attributed partly to the escalating rivalry between China and the US, which led to an uptick in anxiety about the US’ growing strategic and political influence.”

Southeast Asian nations have largely embraced the US as a necessary security presence as the Biden administration ramps up military-to-military cooperation in a bid to counter Bejing’s growing defense prowess. But the region also counts on China as a key financier and trading partner at a time regional leaders seek new investments to bolster their own economies.

Part of the issue for the US are concerns over economic engagement. Southeast Asians are “increasingly unsure” about the effectiveness of the Indo-Pacific Economic Framework for Prosperity, a US-led endeavor to increase trade that’s been criticized for its lack of meaningful market access.

China is once again seen as the most influential economic and political-strategic power in the region, “outpacing the US by significant margins in both domains,” it says.

The latest poll also puts the Israel-Hamas conflict at the top of the list of the region’s geopolitical concerns, with a large proportion of respondents worried “Israel’s attack on Gaza has gone too far.”

Nearly a third of respondents were wary that the Middle East war would catalyze the rise of extremist activities, while diminished trust in international law and a rules-based order was the second-top concern.

“The ongoing Israel-Hamas conflict has emerged as a contentious issue in Southeast Asia, commanding significant attention in the region’s domestic politics,” the survey says. “Despite its geographical distance, the conflict has reverberated strongly across this diverse multi-racial and multi-religious region.”

Whether those sentiments are responsible for the US’ drop in standing among regional nations is unclear, said Bonnie Glaser, the head of the Indo-Pacific program at the German Marshall Fund. “Without more data it’s impossible to answer that,” she said during a presentation of the results.

The US has diplomatically and militarily backed Israel in its quest to destroy Hamas, in the aftermath of the group’s Oct. 7 attack.

While sentiments have broadly shifted towards China, tensions in the South China Sea was the second-biggest geopolitical concern in the latest study. In a hypothetical choice between the US and China, Washington still commands majority support from the Philippines at 83.3% and Vietnam at 79%, which are at the forefront of the territorial disputes with Beijing.

Broadly, “there is a growing sense of optimism among Southeast Asians regarding their future relations with China,” the report states. “The Philippines emerged as the most cautious.”

Source：Bloomberg

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Samantha Luan

Economic

Debt, trade barriers and policy uncertainties are dulling the region’s economic dynamism and governments need to do more to address long-term problems such as weak social safety nets and underinvestment in education, the report says.

Asia’s economies are growing more slowly than before the pandemic, but faster than other parts of the world. And a rebound in global trade — trade in goods and services grew by only 0.2% in 2023 but is projected to grow by 2.3% this year — and easing financial conditions as central banks cut interest rates will help offset weaker growth in China.

“This report demonstrates the region is outperforming much of the rest of the world, but it’s underachieving its own potential,” Aaditya Mattoo, the World Bank’s chief economist for East Asia and the Pacific, said in an online briefing.

“The leading firms in the region are not playing the … role that they should,” he added.

A key risk is that the U.S. Federal Reserve and other major central banks might keep interest rates higher than before the pandemic. Another comes from the nearly 3,000 trade-distorting measures, such as higher tariffs or subsidies, that were imposed in 2023, the report said.

Most of those policies were set by major industrial economies such as the U.S., China and India.

China’s ruling Communist Party has set an official target for about 5% growth this year, just below the 5.2% annual pace of last year.

The World Bank is forecasting that growth will slow to 4.5%.

“China is aiming to transition to a more balanced growth path but the quest to ignite alternative demand drivers is proving difficult,” the report says.

Mattoo said Beijing still has a way to go in shifting its economy away from reliance on real estate construction to drive business activity, and just spending more money won’t fix the problem.

“The challenge for China is to choose efficient policies,” he said. “Fiscal stimulus will not fix structural imbalances,” he said. What is needed are stronger social welfare and other programs that will enable households to spend more, boosting demand that will then encourage businesses to invest.

The region could be doing much better with improved productivity and greater efficiency, Mattoo said.

Vietnam, for example, is drawing huge amounts of foreign investment as a favored destination for foreign manufacturers, but its growth rate of about 5% is below its potential.

“To be happy that Vietnam is growing at 5% reflects the kind of underachievement we should not be happy about,” Mattoo said in an online briefing.

One key problem highlighted in the report is lagging improvements in productivity, the report said. Leading companies in Asia are far behind the leaders in wealthier nations, especially in technology-related areas.

The report faults governments for imposing restrictions on investment that prevent foreign companies from entering key parts of regional economies, a need to build skills and weak management. Opening to more competition and investing more in education would help, it said.

Source: Fortune

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Economic

In February, UK mortgage approvals surpassed expectations, reaching their highest level in 17 months, as indicated by official data reflecting the decline in borrowing costs since mid-last year.

According to the Bank of England, net mortgage approvals for house purchases increased to 60,400 in February from 56,100 in January. This figure exceeded economists' expectations of 56,500 in a Reuters poll and marked the highest level since September 2022.

The "effective" interest rate, representing the actual interest rate paid on newly drawn mortgages, dropped by 0.29 percentage points to 4.9 percent in February, the lowest rate recorded since August 2023, as reported by the central bank.

Source: Bank Of England

Interest rate setters closely monitor mortgage approvals and house prices as they serve as timely indicators of the property market's health, which in turn influences the broader economy and plays a crucial role in monetary policy decisions.

The data released on Tuesday suggests that the housing market recovery is ongoing, driven by the decline in mortgage rates from their peak levels in the summer of 2023.

The decrease in most quoted fixed rates since the latter half of last year reflects the anticipation of a potential interest rate cut by the Bank of England from the current 16-year high of 5.25 percent.

Although some quoted mortgage rates have slightly increased since February due to persistent services inflation, as evidenced by Nationwide's month-on-month drop in March, analysts believe that the property market is showing signs of improvement.

Simon Gammon, managing partner at broker Knight Frank Finance, noted, "The recovery in housing market activity is gaining traction despite a somewhat uncertain start to the year for mortgage rates." He added, "While hotter-than-expected inflation data in January and February led to a few lenders raising mortgage rates, dampening sentiment, it hasn't been enough to stall the market's momentum."

Additionally, the data released by the Bank of England on Tuesday indicates that the impact of higher interest rates is diminishing, with cash deposits in household bank accounts increasing in February, driven by inflows into instant access accounts.

Ashley Webb, an economist at research company Capital Economics, commented, "This further indicates that households are no longer seeking higher interest rates by locking up funds in fixed-term accounts."

However, the figures from Nationwide, which placed the average property cost at £261,142, were worse than anticipated. Economists surveyed by Reuters had expected a month-on-month increase of 0.3 percent in March and an annual rise of 2.4 percent.

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Central Bank

Economic

he world’s advanced economies are moving towards an easing of a central bank interest rates but the Reserve Bank of Australia (RBA) has hinted that cuts might be slower to emerge here.

Minutes of the RBA board’s March meeting, released on Tuesday (2 April), would not rule in or out any official cash rate movements, either up or down, but did hint that cuts in 2024 may be off the table.

“Market participants continued to expect that many advanced economy central banks would begin reducing policy rates from around the middle of the year,” the Board noted, before watering down expectations that Australia would be leading any charge towards rate cuts.

“(Board) Members noted that fewer reductions in the policy rate were expected in Australia than in many other advanced economies.

“They observed that, in part, this was likely because the cash rate had not risen as high as policy rates in other economies, as the Board had chosen to return inflation to target gradually over time in order to preserve the gains in employment.

“Members further observed that market expectations were for policy rates to be at broadly similar levels by the end of 2025 across many advanced economies, including Australia.”

The suggestion Australia would have fallen in line with the likes of the US and UK by the end of 2025 contradicts forecasts from the Big Four banks and other economists that rates would likely be cut towards the end of 2024.

Global financial risks also remained high, the RBA Board said, in justifying its most recent decision to keep rates at 4.35 per cent.

“Further weakness in the Chinese property sector could interact with longstanding macro-financial vulnerabilities. If stresses in the Chinese economy and financial system intensified or broadened, they could spill over to the rest of the world (including Australia) through trade channels and an increase in global risk aversion.

“Worse-than-expected macroeconomic outcomes – for example, arising from global inflation proving more persistent than expected or a geopolitical shock – could result in a disorderly adjustment in financial asset prices.

“Events in recent years had demonstrated the potential for this adjustment to be amplified by vulnerabilities in non-bank financial intermediaries in key global financial centres. RBA Casts Doubt Over 2024 Interest Rate Cut Prospects_1

RBA Casts Doubt Over 2024 Interest Rate Cut Prospects_1

“Tight market spreads, if they persisted over an extended period, could contribute to a build-up of leverage and future risks to financial stability.”

Domestic considerations also pointed to the RBA keeping rates steady for a while yet.

The RBA noted real household disposable income had started growing again — thanks to dissipating inflation and wages growth — and would pick up further this year once Stage 3 tax cuts take affect and disinflation continues.

“Strong conditions in the labour market and the large savings buffers accumulated during the pandemic were helping households adapt to challenging economic conditions and restrictive monetary policy,” the minutes stated.

The RBA minutes show the board considered implications for the cash rate if productivity did not pick up as assumed, and any economic adjustment associated “may not be smooth or immediate”.

The immediate response of the Australian dollar following the release of the minutes was to stay flat, suggesting the market saw no imminent change to the RBA’s interest rate policy.

If borrowers were to glean any optimism from the latest RBA meeting it is that, for the first time since it began its aggressive run of rate hikes, the Board did not consider the option of a rate rise.

“Members observed that inflation had continued to moderate over prior months, broadly as expected,” the minutes noted, before again watering down rate cut expectations.

“That said, services inflation remained high and the recent slowing in the pace of monthly inflation had been influenced by several temporary factors.”

The RBA forecasts inflation, currently 3.4 per cent on its most recent measure, will not fall within its 2 to 3 per cent target band until December 2025.

Bringing inflation back to target “remained the board’s highest priority”, but the board admitted it would “take some time before they could have sufficient confidence that this would occur within a reasonable timeframe”.

Stressed borrowers not an RBA concern

The still-high interest rate environment was not perceived as a major burden on borrowers by the nine members at the meeting or the ten other economic experts present.

“Members noted that most Australian households remained able to service their debts and meet essential expenses, and this was expected to remain true even if inflation were to prove more persistent than anticipated.

“Many borrowers, including those on lower incomes, had also increased the savings they held in offset and redraw facilities over the preceding year; some were likely to have reduced consumption in order to facilitate this.”

There was, however, some qualified empathy.

“Members recognised that a small group of borrowers, typically those with modest savings or income buffers, remained under acute financial pressure owing to the effects of high inflation and higher interest rates.”

If interest rates are a source of financial stress, as they were for 26 per cent of respondents to API Magazine’s latest quarterly Property Sentiment Report, relief may still be some way off.

Source：apimagazine

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Samantha Luan

Economic

Commodity

Iron ore’s reset to around $100 a ton is indicative of a broader reshaping of China’s commodities markets that favors the new economy over the old.

The steelmaking material plunged to $95.40 a ton on Monday, a 10-month low, before nosing back into three figures, testimony to the damage still being wrought by a years-long property crisis that appears far from over. In early January, Singapore futures hit $143.50 a ton, their highest since June 2022.

Iron ore’s weakness comes amid tentative signs that the wider economy is beginning to heal. Factory activity snapped a five-month contraction in March, beating estimates and adding to modest signs of recovery. Iron Ore’s Reset Lower to $100 Heralds China’s New Economy Shift_1

Iron Ore’s Reset Lower to $100 Heralds China’s New Economy Shift_1

That divergence between a manufacturing-led upswing and a languishing property market is likely to deepen as Beijing pursues new drivers of growth in sectors like renewable energy and advanced technology. At its peak in 2018, real estate accounted for nearly a quarter of China’s economy, according to Bloomberg Economics. Now it’s less than a fifth.

Property still makes up the bulk of steel demand. But Beijing has held off on delivering the degree of fiscal stimulus — principally infrastructure spending — that could fully offset the housing crash. Ballooning debt levels at local governments are one obstacle. Meanwhile, the usual lift to construction activity in the spring has also failed to properly materialize, creating uncertainty over when consumption might revive.

All to say, President Xi Jinping’s crackdown on property and his drive for “new productive forces” could well herald an era in which iron ore plays a lesser role to the metals set to benefit from the energy transition.

Structural Shift

“It’s understandable if the weakness lasts for a week or two,” said Cao Ying, chief ferrous metals analyst at SDIC Essence Futures Co. “Any longer than that and the market will start to adjust its expectations as it will look more like a structural shift.”

Iron ore can’t stay below $100 a ton for too long without higher cost producers shutting up shop. That would thin out supply and put a floor under prices in the near term. But it’s the long-term demand side of the equation that’s causing most concern. The government in Australia, China’s biggest supplier, expects free-on-board prices of $95 a ton this year, $84 next year, and then levels in the $70s out through 2029.

The market’s crash contrasts starkly with another commodities bellwether, copper, which is closing in on a yearly high. Supply issues are the immediate driver, but the metal’s central role in the energy transition is driving predictions of outsized gains in the years to come. Steel and iron ore markets just won’t enjoy the same level of support from that secular shift in commodities consumption.

“There seems to be no end to the real estate crisis, local governments can’t sustain current investment levels, consumers are still very cautious,” said Tomas Gutierrez, analyst at Kallanish Commodities Ltd. There should be a seasonal demand recovery in the second quarter, “but this is not likely to be strong enough to really turn markets around,” he said.

Source：Bloomberg

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Economic

In March, German inflation experienced its third consecutive month of easing, reinforcing predictions that the European Central Bank will commence interest rate reductions in June. According to data from the statistics office, consumer prices increased by 2.3% annually last month, a decline from February's 2.7% and below the median estimate of 2.4%

Source: Destatis

Following France's report of a deceleration on Friday, similar trends were observed in Italy and Spain, where price gains accelerated. This aligns with policymakers' cautions that achieving the 2% target won't be straightforward. Across the region, as governments phase out aid measures introduced during the period of soaring energy costs, inflation is experiencing fluctuations due to one-off effects. This pattern is evident in Germany as well, where tax adjustments and the introduction of a discounted transport ticket in 2023 are expected to contribute to upward pressure, as noted by Deutsche Bank economist Sebastian Becker.

However, the overarching trend continues to depict a widespread decline, providing the European Central Bank with an opportunity to signal to investors its intention for an initial reduction in borrowing costs come June. Euro-zone data, slated for release on Wednesday, are anticipated to reveal a decrease to 2.5%. A recent Bloomberg Economics nowcast, adjusted following the release of German figures, indicates a slightly lower estimate of 2.4%.

The Ifo institute reported on Tuesday that in Germany, a decreasing number of companies, especially those in consumer-related sectors, intend to implement price hikes. In March, an index reflecting these expectations reached its lowest point in three years.

Persistent apprehension revolves around the resilience of the labor market and the consequent substantial rise in wages, which could prolong elevated underlying inflation. Confirmation of a slowdown in wage growth will be gradual, leading most officials to rule out a rate cut at the upcoming policy meeting next week.

Last week, ECB Executive Board member Piero Cipollone cautioned against overemphasizing salaries, emphasizing that the fragile economy of the euro zone requires workers' pay to align with prices to support the anticipated gradual recovery.

The course of events following the initiation of monetary easing remains uncertain. While some officials have emphasized the importance of staying reliant on data and assessing developments on a meeting-to-meeting basis, others seem to advocate for a swifter relaxation of policies.

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