Is migration the reason higher mortgage rates have not led to sustained house price falls?

I suppose that if you are the house journal for the Bank of England then house prices will rarely be far from your mind. This from the Financial Times yesterday will have been like an oasis in a desert for the research student presenting today’s Bank of England morning meeting.

The widespread drop in global house prices that hit advanced economies has largely petered out, according to a Financial Times analysis of OECD data, leading economists to predict that the deepest property downturn in a decade has hit a turning point.

This sort of analysis is bound to go down well with Governor Andrew Bailey as everyone points out how masterfully he has handled things. Actually the mention of the deepest downturn in a decade raises a wry smile as it is pretty much the only one, so a low barrier to cross! Also it raises another issue as at that time we were at peak interest-rate expectations and heading for bond yield peaks thus heading for peak mortgage rates.

In terms of the numbers we are told this by the Financial Times.

Across the 37 industrialised OECD countries, nominal house prices grew 2.1 per cent in the third quarter of 2023 compared with the previous three months, up from near stagnation at the start of last year. Only about one-third of those countries reported a quarter-on-quarter decline in the latest period, down from more than half at the start of the year, according to the FT analysis.

As to an explanation I am afraid that the FT has got itself into rather a pickle.

Housing prices took a hit in late 2022 after central banks in most economies raised interest rates at the fastest pace in decades to curb inflation.

In fact overall they did not fall as the numbers show a 0.6% rise but the real issue comes here.

However, that decline has eased or even reversed in many economies as expectations that central banks will cut borrowing costs this year have helped mortgage rates to decline.

Not back in the period the FT is looking at it did not as this was in the period of interest-rate rises and central bankers beginning to make speeches about them being “higher for longer”. The peak in US bond yields when the 30-year was around 5.1% and the ten-year was 5% was yet to come as it happened in late October.So in fact this measure of house prices turned before mortgage rates did.

Even since someone told me that they had made all their money by reversing what Capital Economics had told them I read stuff like this with a smile.

“The most recent data suggest that house price falls have now bottomed out in most countries,” said Andrew Wishart, senior property economist at Capital Economics. “I think we’ve had the house price correction that we’re going to get.”

Migration

Along the way we get a mention of another factor in play and another reason why the Financial Times is such an enthusiastic supporter of it.

House prices are “close to the bottom in many places and recovering in a lot of places”, said Tomasz Wieladek, economist at investment company T Rowe Price. He said that migration and restrictive planning permission had kept the pressure on house prices in many countries, including the UK, Canada and Australia.

Yes the M word or migration. This reminds me of something I noted around ten days ago from Eric Finnegan.

US population grew +3.8M in 2023 – the largest one-year increase in US history. (We think a recent Census estimate of +1.6M growth underestimated immigration flows.) The surge is likely short-lived as its almost all from immigration, which is conditional on policy, legislation, regulations, etc. Even so, the surge will have important ripple effects for year through housing, the economy, and the rest of society.

As you can see migration is a factor in the US as well if he is even remotely right about the population increase. So we can add that to the analysis below.

House prices have held up best in the US, where solid economic and job growth helped nominal house prices to rise 5.2 per cent in the year to November.

Germany

At the moment Germany always seems to be on the other side of the coin.

Prices are likely to fall further in some countries such as Germany, Denmark and Sweden, which have larger rental markets, “but even in these economies we think that most of the fall in prices is already behind us”, said Wishart.

In isolation I have a very different view to the central banking and media consensus as I welcome an improvement in affordability, although widening the analysis reveals that it is the cost of living crisis driving this. In fact we get more detail on Germany.

Germany, by contrast, where economic woes, property overvaluations and a large rental market weigh on the sector, saw a 10.2 annual contraction last year — the worst of the EU economies excluding Luxembourg.

Luxembourg is a curious addition as you would think that all the EU bureaucrats would continue to oil the wheels. But returning to migration Germany famously had the surge in the Merkel area with the invitation to one million which led to her being the Financial Time person of the year in 2015. Did Germany get its house price boost back then?It would not be easy to isolate as that was also the beginning of the era of negative interest-rates.

International Numbers

We get some numbers plus a rather curious analysis.

Fitch now estimates nominal prices grew 6 per cent in the US last year, down from a previous forecast of up to a 5 per cent contraction, while in the UK it predicts a milder 2 per cent contraction in 2023 compared with a previous estimate of up to 7 per cent. The better forecasts are partly because high inflation hid the scale of the decline, economists said.

“Hid the scale of the decline” when in the US they went up? That is weak at best. Moving on regular readers who have been following my warnings about China over the past couple of years will not be surprised to read this.

In China, which has been experiencing an acute housing downturn, Fitch forecast house prices would continue to fall for the next two years, warning that investment demand “has mostly vanished” following a 7 per cent price contraction over the past two years.

Comment

There is quite a bit to consider here. I was expecting house price falls which have not really happened, although I think that care is needed . This is because the advent of fixed-rate mortgages may well have delayed the impact.They get near the area but do not make the connection.

Households will continue to face higher mortgage costs as they come off fixed-rate deals,

Also the FT misses that in real terms  prices have fallen as for once there is some good news from wage growth which in the UK for example has been 6-7%.

If we step back any such falls are minor compared to the post pandemic surges we saw as central banks slashed interest-rates and embarked on a orgy of QE bond buying. So my concern is that for the young housing is unaffordable especially in areas like mine ( SW London). That is why so much official effort goes into keeping actual housing costs out of inflation numbers so that in the US rents are nearly a third of the CPI when much of that is pure fantasy. So let me welcome the news from the UK HCI inflation index this morning. The emphasis is mine.

One example is owner-occupiers’ household costs (OOH), which measure what it costs owner-occupiers to live in their own homes. Unlike CPIH, the HCIs are based on the payments approach, which includes changes in mortgage interest payments. These are the actual costs paid by households out of their disposable income, rather than imputed rents, which are a proxy for the cost of consuming shelter as a housing service.

I fear it will never catch on……

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