Spotlight on residential property

INSIGHT WEEKLY : January 14, 2024

An easy to read economic and financial summary. If the images do not load, click to download external images in your email to see the newsletter in full, or click the link above to read online.

🌐 Overview

🌐 Major indexes

🇬🇧 UK

Spotlight on UK residential property

Property prices have risen slightly for the third consecutive month. Construction has picked up. Mortgage approvals are up. A few lenders have cut rates, and more are likely to follow. There is still a supply shortage and this shortage is helping to support prices.

Falling interest rates would normally be a spur for asset classes, but not at this time for property. The UK property market has structural issues. Renters are unable to get on the property ladder due to high prices and property owners who are locked in to good long term rates are staying put to avoid refinancing at higher rates. So there is less demand and lower transaction volumes.

Investors are looking to exit the market due to the tax rules. There are better returns to be had elsewhere (S&P500 returned 79% over the last 5 years). International investors have been scared away by punitive taxation. The funding of the regeneration of previously deprived areas like parts of East London had been financed by these investors, but they are no longer investing. Also Brexit has impacted the financial sector with many who had settled in London decamping to Paris and Frankfurt. So there is more supply in some parts of London.

However, there is not enough housing stock overall so demand and supply are more or less offset. Which means prices are not likely to change up or down significantly in the near term.

It is not clear how the rental sector will be kept supplied with additional stock if investors are leaving. New developments will not attract enough investors so developers will hold back from starting new projects. There will not be much urban regeneration. As the rental sector contracts, there will be increases in rents. Increased rental yields have not been enough to compensate for the tax disincentives, so this will not stem the outflow of investors.

The property market has fractured into hotspots and cooler spots. The hotspots were driven by Covid related pent up demand, some neighbourhoods became highly sought after due to the new phenomenon of working from home and also the demographic of young families who needed to move to the right kind of home in the right area.

If there is not enough capital to fund the construction of new homes, new sources will need to be found. The tax regime has made investment unattractive for private investment and a cash strapped government will not be able to provide the funding needed.

Other news

The UK economy grew in November mainly due to retail sales. There was a decline in October. More months of growth will be needed before it can be said that the UK has avoided recession.

🇺🇸 US

Spotlight on residential property

A similar picture to the UK. Mortgage rates have been high for some time and are now starting to decline. Average monthly payments reached a record high during 2024. Low stock, and the lowering of interest rates are expected to keep prices level. As in the UK, house prices appear to be at the low point, but there does not seem to much prospect for increases during 2024. Those who have locked into pre pandemic low rates (around 85% of homeowners), are not likely to want to move and pay much higher rates.

Other news

Despite a small increase in inflation in the US, investors shrugged off the news. It is clear that the inflation trend is down and a small blip does not change anything. The outlook is still positive for low inflation, lower interest rates and growth in the second half of the year. During the week, the S&P500 briefly pushed past its all time high. Microsoft (AI is hot right now) also briefly pushed past Apple to be the world’s most valuable company with a market capitalisation of $2.87 trillion before Apple reclaimed its top spot. A bit of history - Microsoft and Apple fell out in the late 1980’s and 1990’s which included lawsuits. In 1997, Apple hit hard times and it was Microsoft who stepped in with an investment to keep Apple from collapsing. Now they are both giant companies comprising about 14% of the S&P500. It is Microsoft that appears to have the better prospects with AI. Apple’s iPhone sales are falling, especially in China. It will have to show new products incorporating AI to keep its market value.

🇯🇵 Japan

After a strong performance in 2023, the year has started on an upbeat note with an 8% increase in the Nikkei 225 in the first two weeks of 2024 ! That’s after a 28% increase in 2023. It is the first time since 1990 that the Nikkei 225 has closed above 35,000. The Bank of Japan continues with its loose monetary policy with no change expected. The underlying conditions are good.

🚢 Shipping

Some countries have responded to the attacks on Red Sea shipping in the form of air strikes at sites in Yemen. The uncertainty of shipping through this artery may lead to a more permanent arrangement to go around Africa rather than through the Red Sea. Shippers appear to be sending cargo by this longer route as well as waiting to see how the situation unfolds. The implications for the global economy will be inflationary as the additional costs will be passed on to consumers, whether it is additional costs for a longer trip around Africa or higher insurance costs by going through the Red Sea.

The Red Sea/Suez Canal is not the only route worrying shippers. In the Americas, the Panama Canal is having issues with drought. Water levels are too low for large ships. Maersk is using a “land bridge” as a workaround in Panama between the Pacific coast and the Atlantic coast !

🛢️ Oil is volatile but now at almost the same price as last week : Brent at $78, WTI at $73. Oil tankers do not appear to be targeted in the Red Sea attacks.

💰 Gold is volatile, slightly higher than last week: Gold at $2,048 per ounce

🪙 Crypto Corner

Bitcoin spot ETF’s

There was great anticipation in the days leading up to the Securities and Exchange Commission’s approval for Bitcoin spot ETF’s (Exchange Traded Funds). A total of 11 spot ETF’s were approved.There were already Bitcoin futures ETF’s which buys futures contracts on Bitcoin, but a spot ETF can buy actual Bitcoin. This is a big deal in the crypto world. On the first day of the spot ETF trading, $4.6bn of volume was traded. This could be a watershed moment for the crypto world, bringing billions of dollars into Bitcoin. But not everyone was excited by these developments. Bitcoin’s price has fallen back to the pre ETF level of last week, though the trend from October is still up. Whether this is truly a defining moment in Bitcoin’s history of over 10 years remains to be seen.

🏅5️⃣ Billionaire Leaderboard (change in week)

Elon Musk (Tesla, SpaceX)$230bn ⬇️ $13bn

Bernard Arnault and family (LVMH) $182bn ⬇️ $5bn

Jeff Bezos (Amazon) $177bn ⬆️$9bn

Larry Ellison (Oracle)  $135bn ⬆️ $3bn

Mark Zuckerberg  (Facebook/Meta) $132bn ⬆️ $7bn

Next week : Spotlight on Japan