8th March 2013
Fund manager Standard Life Investments says that the global stock market rises may be partly underpinned by a recovery in housing markets around world.
Andrew Milligan, Head of Global Strategy, Standard Life Investments says that this may explain the “apparent disconnect between rampant equity markets and muted global growth”.
In a note to investors, he writes: “Some cynics would say that we are merely witnessing a manufactured asset bubble created by desperate policymakers. However, while it would be difficult to argue that unconventional policy action has not played a part, the progress in equity markets may be backstopped by another powerful force – a recovery in global housing.”
He argues that while housing may not comprise much of any stock market index, an unhealthy construction sector can prove a significant drag.
“Of course, housing is not typically a very large part of any stock market index so why should it be such an influential force? Well, financing and spending associated with housing are very important signals for the wider economy, policy making and the direction of financial markets. The recent past has also illustrated how significant a drag an unhealthy construction sector can prove on economic progress. So what is the current state of global housing markets and what does this tell us about the efficacy of policymaking?”
Milligan says this is particular true of the US housing market. “Having been put through the mangle in recent years, you might expect the US housing market to be badly bent out of shape. Clearly, some of the adjustments in the US have been rather brutal, with falling prices, excessive inventory and mortgage delinquencies all playing their part. However, during 2012 we witnessed a stabilisation in the housing market, with housing permits recently crossing over their rolling long-term moving average. Indeed, the inventory of new homes versus sales, at 4.1 months, is now the lowest since April 2005. Importantly, house prices rises have also accelerated over the past year, with prices in the largest cities up almost 7 per cent the strongest annual gain since the end of the recession,” the note says.
Milligan adds that Fed Chairman Ben Bernanke has noted that “keeping longer term interest rates low has helped spark a recovery in the housing market”. Of course, this progress could be swiftly derailed by a hit to household incomes from sequestration or a rise in mortgage funding costs, but we must assume that Bernanke is well aware of his conservationist role.”
He says that a similar balancing act is taking place in China.
“Policymakers must strike a delicate balancing act in China too, where 10 consecutive months of sequential property price growth in the major cities, as well as significant price hikes in first-tier cities, has resulted in a resurfacing of concerns regarding an overheating property sector. Last week, the State Council announced new property market controls designed to curb speculative demand and boost supply. Yet, this may be just the aperitif for a wider shift in housing policy, including taxation and land reform, as the new Chinese leadership pushes forward with a large scale urbanisation programme as part of its five-year plan. Key to this urbanisation agenda is a need to prevent inflated housing prices from hindering the resettlement of China’s migrant workforce in urban centres.”
In Europe, as with the economy in general, the picture is more mixed. The note continues: “In Europe, the housing landscape is a patchwork of disparate local funding environments and price trends. In Germany and the UK there have been some encouraging signs on mortgage credit expansion with bank loans extended for home purchases rising 2% year-on-year in Germany, while the Bank of England’s (BoE) fourth quarter credit survey pointed to an increase in demand for housing during the first quarter. This in turn is feeding through to prices with German home prices jumping 4.5 per cent between September and December last year while the Rightmove report for February revealed the strongest growth in UK asking prices in five years. Of course, these improvements are from a rather low base and other data such as an 11 per cent year-on-year decline in housing starts in England during 2012, point to some of the challenges still to be faced.
“These issues are even more acute in peripheral European nations where the collapse of a housing bubble has burdened both the financial system and households. In Ireland, house prices declined 4.5 per cent last year and are now down more than 50% below their peak in 2008. Residential mortgage arrears are still increasing, with the value share of owner occupying mortgages in arrears rising to 11.3 per cent in the third quarter of last year. In Spain the adjustment process has been equally painful, with excessive supply remaining an acute problem. However, house sales have stopped declining, with inventory levels beginning to fall as some credit institutions, emboldened by the ECB’s backstop, resorting to fire sales of excessive stock.”
Looking to the longer term
The note concludes:
“Of course, while progress has been made, the rehabilitation of global housing markets is far from complete. As longer term investors, we need to look forward. So what should we expect for 2013-14? Despite improving fundamentals, particularly in the US, it is clear that housing markets across the globe will continue to require a supportive policy environment. In the short term, this is likely to continue to mean low interest rates, to restrain funding costs, but there may be other more innovative approaches to ensure that recent momentum is sustained. In the UK, the BoE has introduced a Funding for Lending Scheme to help with mortgage costs and availability. There is also growing speculation ahead of the Budget of plans for more shared equity schemes, social housing and support for first-time buyers. Clearly, the government will be hoping that such targeted tools prove more cost efficient than the indiscriminate approach of QE. After all, housing starts in the UK are only running about 100,000 a year, half the level needed to cope with population growth – so an expansion could provide a much needed growth boost.
“Yet, governments must also be careful that assistance to the housing market does not postpone painful restructuring. Getting the right balance may prove more challenging as global housing cycles are far from synchronised. Indeed, local conditions, such as excessive demand in China and the UK versus excessive supply in Spain and the US, are likely to trigger a greater diffusion in government housing strategies. Understanding the likely success or failure of these may be a key determinant of asset prices far beyond the housing sector.”