WASHINGTON, Sept 26 (Reuters) – U.S. consumer confidence dropped to a four-month low in September, weighed down by persistent worries about higher prices and rising fears of a recession, though households remained generally upbeat about the labor market.
The second straight monthly decline in confidence reported by the Conference Board on Tuesday also reflected higher interest rates and concerns about the political environment.
The nation faces a potentially disruptive shutdown of the federal government on Saturday amid political wrangling. Confidence fell across all age groups, and was most pronounced among consumers with annual incomes of $50,000 or more.
“Inflation is slowing, but prices are still higher than they were before the pandemic and this is taking a toll on consumer confidence,” said Christopher Rupkey, chief economist at
FWDBONDS in New York.
The Conference Board said its consumer confidence index dropped to 103.0 this month, the lowest reading since May, from an upwardly revised 108.7 in August. Economists polled by Reuters had forecast the index easing to 105.5 from the previously reported 106.1. Consumers’ perceptions of the likelihood of a recession over the next year ticked back up.
A sharp decrease in the expectations measure accounted for the decline in confidence, which economists partially attributed to the looming government shutdown, with Congress so far failing to pass any spending bills to fund federal agency programs in the fiscal year starting on Oct. 1.
Hundreds of thousands of federal workers will be furloughed and a wide range of services, from economic data releases to nutrition benefits, suspended beginning on Sunday.
“Consumers also expressed concerns about the political situation and higher interest rates,” said Dana Peterson, chief economist at The Conference Board in Washington.
The cutoff date for the preliminary survey was Sept. 18. Millions of Americans will also start repaying their student loans in October and most have run down their pandemic savings.
The survey showed consumers increasingly concerned about their family finances.
The Federal Reserve last week left its benchmark overnight interest rate unchanged at the 5.25%-5.50% range. The U.S. central bank, however, stiffened its hawkish stance, projecting another rate hike by year end and monetary policy staying significantly tighter through 2024 than previously expected.
The Fed has hiked the policy rate by 525 basis points since March 2022.
Though consumers continued to fret over the higher cost of living, their inflation expectations over the next year remained stable and they showed no intentions of drastically pulling back on purchases of motor vehicles and other big-ticket items like television sets and refrigerators over the next six months.
Fewer, however, expected to buy a house, with the rate on the popular 30-year fixed-mortgage the highest in more than 22 years and home prices reaccelerating.
Consumers’ 12-month inflation expectations were unchanged at 5.7% for the third straight month.
Consumer spending remains underpinned by a tight labor market, which is keeping wage growth elevated.
The survey’s so-called labor market differential, derived from data on respondents’ views on whether jobs are plentiful or hard to get, widened to 27.3 this month compared to 26.7 in August. This measure correlates to the unemployment rate in the Labor Department’s closely followed employment report.
Stocks on Wall Street fell. The dollar rose against a basket of currencies. U.S. Treasury prices were lower.
HOUSE PRICES ACCELERATE
A separate from the Commerce Department showed new home sales plunged 8.7% to a seasonally adjusted annual rate of 675,000 units in August after racing to a 17-month high in July.
Economists had forecast new home sales, which account for a small share of U.S. home sales, falling to a rate of 700,000 units. New home sales are counted at the signing of a contract, making them a leading indicator of the housing market. They, however, can be volatile on a month-to-month basis. Sales increased 5.8% on a year-on-year basis in August.
Though new home sales remain supported by a dearth of previously owned homes on the market, the resurgence in mortgage rates is reducing affordability for prospective home buyers.
The rate on the 30-year fixed mortgage vaulted above 7% in August and climbed to an average of 7.19% last week, the highest since July 2001, according to data from mortgage finance agency Freddie Mac. Mortgage rates are rising in tandem with U.S. Treasury yields, which have surged on worries that soaring oil prices could hamper the Fed’s fight against inflation.
“While we expect higher rates to hurt new home sales, we think they will be more resilient than existing home sales as builders seem willing to scale up their use of incentives to motivate sales,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics in New York.
A third report from the Federal Housing Finance Agency showed annual home price growth quickened for a second straight month in July, largely reflecting the tight supply in the market for previously owned homes. House prices jumped 4.6% on a year-over-year basis in July after rising 3.2% in June. Prices shot up 0.8% month-on-month after advancing 0.4% in June.
The resurgence in house prices was seen feeding through to higher inflation, likely giving the Fed cover to maintain its hawkish posture for some time.
“The Fed will see the reacceleration of house prices as a reason to keep interest rates higher for longer,” said Bill Adams, chief economist at Comerica Bank in Dallas. “Renting households are seeing some relief in new lease prices, but since two thirds of Americans are homeowners, the Fed cannot afford to look past house prices’ influence on the cost of living.”
Reporting by Lucia Mutikani; Additional reporting by Amina Niasse; Editing by Chizu Nomiyama and Andrea Ricci
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Construction sites are photographed in Frankfurt, Germany, July 19, 2023. REUTERS/Kai Pfaffenbach Acquire Licensing Rights
BERLIN, Sept 22 (Reuters) – German housing prices fell by the most since records began in the second quarter as high interest rates and rising materials costs took their toll on the property market in Europe’s largest economy, government data showed on Friday.
Residential property prices fell by 9.9% year-on-year, the steepest decline since the start of data collection in 2000, the federal statistics office said. Prices fell by 1.5% on the quarter, with steeper declines in larger cities than in more sparsely populated areas.
In cities such as Berlin, Hamburg and Munich, apartment prices fell by 9.8% and single and two-family house prices dropped by 12.6% on the year.
For a decade, low interest rates have fuelled a property boom in Europe’s largest real estate investment market. A sharp rise in rates and increasing construction costs have put an end to the run, tipping a string of developers into insolvency as deals froze and prices fell.
Building permits for apartments in Germany declined 31.5% in July from a year earlier, the statistics office disclosed on Monday, as construction prices rose by almost 9% on the year.
Germany aims to build 400,000 apartments a year, but has struggled to meet the goal.
German housing industry association GdW on Friday sounded the alarm over the situation calling for government support for construction companies.
“The construction crisis in Germany is getting worse day by day and is increasingly reaching the middle of society,” GdW, which represents around 3,000 housing companies nationwide, said in a statement.
GdW called for a cut in value added tax (VAT) to 7% from the current level of 19% for affordable rentals and government funding loans with a 1% interest rate to support companies.
The government is scheduled to hold a summit with the industry on Monday to discuss the situation.
GdW and the Haus&Grund owner’s association said they were boycotting the summit as they had too little influence on its agenda.
The German cabinet plans to present an aid package for the industry by the end of month after announcing plans to promote the construction sector, including reducing regulatory and bureaucratic requirements.
Reporting by Riham Alkousaa and Klaus Lauer, editing by Kirsti Knolle and Sharon Singleton
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WASHINGTON, Sept 21 (Reuters) – The number of Americans filing new claims for unemployment benefits dropped to an eight-month low last week, pointing to persistent labor market tightness even as job growth is cooling.
The report from the Labor Department on Thursday also showed unemployment rolls in early September were the smallest since January. It was published a day after the Federal Reserve held interest rates steady but stiffened its hawkish stance, with a further rate increase projected by the end of the year and monetary policy to be kept significantly tighter through 2024 than previously expected.
“This economy is just not showing any sign of slowing down which hints that inflation will not be coming back down to target,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “The Fed was wise to keep another interest rate hike in their back pockets just in case, and it now looks like another rate hike is warranted.”
Initial claims for state unemployment benefits dropped 20,000 to a seasonally adjusted 201,000 for the week ended Sept. 16, the lowest level since January. Economists polled by Reuters had forecast 225,000 claims for the latest week. Claims are in the lower end of their 194,000-265,000 range for this year.
Claims could, however, increase in the coming weeks as a partial strike by the United Auto Workers (UAW) union forces automobile manufacturers to temporarily lay off workers because of shortages of some materials.
The UAW last week launched a targeted strike against Ford (F.N), GM (GM.N) and Stellantis (STLAM.MI), impacting one assembly plant at each company. It has threatened to broaden the work stoppages, which for now only involve about 12,700 of the affected 146,000 UAW members.
Though striking workers are not eligible for unemployment benefits, the walkout has snarled supply chains.
Ford has furloughed 600 workers who are not on strike, while GM expected to halt operations at its Kansas car plant, affecting 2,000 workers. Chrysler parent Stellantis said it would temporarily lay off 68 employees in Ohio and expects to furlough another 300 workers in Indiana.
Unadjusted claims rose by only 67 to 175,661 last week. There were notable declines in filings in Indiana and California, which mostly offset sizeable increases in South Carolina, New York and Georgia.
Fed Chair Jerome Powell said on Wednesday that “the labor market remains tight, but supply and demand conditions continue to come into better balance.”
Employment growth has been slowing and job openings falling. Labor market resilience is propping up the economy even as recession fears linger. The leading indicator, a gauge of future U.S. economic activity, fell 0.4% in August after dropping 0.3% in July, the Conference Board said in a second report on Thursday.
It has dropped for 17 straight months. Since March 2022, the U.S. central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25%-5.50% range.
The claims data together with the Fed’s hawkish stance pushed stocks on Wall street lower. The dollar gained versus a basket of currencies. U.S. Treasury prices fell, with the yield on the benchmark 10-year bond rising to a nearly 16-year high.
HOUSING FALTERING
The claims data covered the period during which the government surveyed business establishments for the nonfarm payrolls component of September’s employment report.
The strike is unlikely to have an impact on payrolls as it started towards the end of the survey week. Workers most likely received pay for that week. Claims fell between the August and September survey period.
Data next week on the number of people receiving benefits after an initial week of aid, a proxy for hiring, will offer more clues on the state of the labor market in September.
The so-called continuing claims declined 21,000 to 1.662 million during the week ending Sept. 9, also the lowest level since January, the claims report showed. That suggests laid-off workers are quickly finding employment.
While the labor market remains unbowed, the housing market is faltering after showing signs of stabilizing earlier this year as mortgage rates resume their upward trend in tandem with the 10-year Treasury note, which has spiked on worries soaring oil prices could hamper the Fed’s fight against inflation.
Existing home sales slipped 0.7% last month to a seasonally adjusted annual rate of 4.04 million units, the National Association of Realtors said in a third report.
Existing home sales are counted at the closing of a contract. Last month’s sales likely reflected contracts signed in July, before the recent run-up in mortgage rates, which lifted the rate on the popular 30-year fixed mortgage above 7%.
Home sales last month were restrained by persistently tight supply, with inventory falling 14.1% from a year earlier to 1.1 million, the lowest on record for any August.
As a result, the median house price accelerated 3.9% from a year earlier to $407,100, the fourth-highest reading. It hit a record $413,000 in June 2022.
“The prospects for improved sales in the coming months look bleak,” said Ben Ayers, senior economist at Nationwide in Columbus, Ohio. “2023 could end in a whimper for the real estate sector as any substantial pull-back in rates is likely far off into 2024.”
News on manufacturing was downbeat. Manufacturing together with housing have borne the brunt of the Fed’s aggressive monetary policy tightening.
A fourth report from the Philadelphia Fed showed factory activity in the mid-Atlantic region slumped in September. Firms in the region that covers eastern Pennsylvania, southern New Jersey and Delaware reported decreases in new orders and shipments. They continued to report a decline in employment.
The Philadelphia Fed’s business conditions index fell to -13.5 this month from 12.0 in August. It was the index’s 14th negative reading in the past 16 months.
“Softer demand for goods and higher borrowing costs are hurdles for activity,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York. “But re-shoring of supply chains, infrastructure projects and a stabilization in demand could provide support to manufacturing output over time.”
Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Paul Simao and Andrea Ricci
Our Standards: The Thomson Reuters Trust Principles.
Men stand near residential buildings in Beijing, China April 14, 2022. REUTERS/Tingshu Wang/File Photo Acquire Licensing Rights
BEIJING, Sept 15 (Reuters) – A slump in China’s property sector worsened in August, with deepening falls in new home prices, property investment and sales, despite a recent flurry of support measures, adding pressure to the world’s second-largest economy.
New home prices fell at the fastest pace in 10 months in August, down 0.3% month-on-month after a 0.2% decline in July, according to Reuters calculations based on National Bureau of Statistics (NBS) data. Prices were down 0.1% from a year earlier, after a 0.1% decline in July.
For August, property investment fell for the 18th straight month, down 19.1% year-on-year from a 17.8% slump the previous month, separate data showed on Friday. Home sales are down for the 26th consecutive month, according to Reuters calculations based on the data.
China has in recent weeks delivered a raft of measures to boost home buying sentiment, including easing some borrowing rules, and relaxing home purchasing curbs in some cities.
These policies have given major cities like Beijing a tiny boost in new home sales, but some worry they might be short-lived and could potentially dry up demand in smaller cities.
China’s broader economy is showing signs of stabilisation with economic figures showing quickening growth in industrial output and retail sales.
However, analysts say a series of supportive policies have yet to firm up the crisis-hit property sector with major Chinese developers still fighting to avoid default.
“We are still hopeful that housing sales would stage small sequential pickups in the coming months, but stimulus will ultimately stop short of reflating the sector,” said Louise Loo, China economist at Oxford Economics.
China’s central bank said on Thursday it would cut the amount of cash banks must hold as reserves, its second such easing this year.
“The more material risks in the near-term come from some property developers and financial institutions, and a small RRR cut could do very little to help,” said Nomura in a research note on Friday.
Around 30 cities eased home purchase curbs and relaxed mortgage rules for buyers in recent weeks but analysts say Beijing may have to introduce more aggressive property easing measures to deliver a real recovery.
Authorities may also need to lift almost all restrictions on home transactions, invest more in the urban renovation programme, speed up infrastructure spending and restructure local government debt, said Nomura.
Moody’s on Thursday cut China’s property sector outlook to negative from stable, citing economic growth challenges, which the rating’s agency said will dampen sales despite government support.
China’s property crisis is seen as one of the biggest stumbling blocks to a sustainable economic recovery, with rising risks of default among private developers threatening to imperil the country’s financial and economic stability.
Reporting by Liangping Gao, Ella Cao and Ryan Woo
Editing by Sam Holmes
Our Standards: The Thomson Reuters Trust Principles.
Terraced houses are seen in Liverpool, Merseyside, Britain May 28, 2023. REUTERS/Carl Recine/File Photo Acquire Licensing Rights
LONDON, Sept 14 (Reuters) – British house prices showed the most widespread falls in 14 years in August as demand weakened against the backdrop of elevated mortgage costs and economic uncertainty, an industry survey showed on Thursday.
The Royal Institution of Chartered Surveyors (RICS) house price balance, which measures the difference between the percentage of surveyors seeing rises and falls in house prices, slumped to -68 in August from -55 in July.
Thursday’s house price balance marked the weakest reading since February 2009 and was below the -56 forecast in a Reuters poll of economists.
Simon Rubinsohn, chief economist at RICS, said the survey pointed to a sluggish housing market with little sign of relief in prospect.
“Prices are continuing to slip albeit that the relatively modest fall to date needs to be seen in the context of the substantial rise recorded during the pandemic period,” Rubinsohn said.
The survey results echoed other signs of slowdown in the property sector.
Mortgage lenders Halifax and Nationwide have both shown prices falling in monthly terms as the Bank of England’s sustained run of interest rate rises, persistent inflation and a prolonged cost-of-living crisis squeeze home-buyers.
Official figures, released on Wednesday, showed the country’s economy shrank by a sharper-than-expected 0.5% in July after public sector strikes and unusually rainy weather weighed on output.
Overall across Britain, RICS’ measure of agreed sales was the weakest since April 2020 when much of the property sector was on lockdown due to the COVID-19 pandemic, and new buyer enquiries fell marginally from the month before.
In the rental market, tenant demand continued to outstrip landlord instructions, limiting the number of available homes to rent, while a net balance of +60% surveyors expect to see a rise in rental prices over the coming three months.
Separate figures from property website Zoopla on Thursday showed the joint-highest rental affordability squeeze, with tenants spending 28.4% of their earnings in July on rent.
Reporting by Suban Abdulla, editing by Andy Bruce
Our Standards: The Thomson Reuters Trust Principles.
A construction site of residential buildings by Chinese developer Country Garden is pictured in Tianjin, China August 18, 2023. REUTERS/Tingshu Wang/File Photo Acquire Licensing Rights
HONG KONG, Sept 5 (Reuters) – Country Garden (2007.HK) has made interest payments on two U.S. dollar bonds just as a grace period was due to end on Tuesday, a person close to the company said, in a relief for the embattled developer and crisis-hit Chinese property sector.
China’s largest private property developer failed to pay coupons on the bonds totalling $22.5 million due on Aug. 6, exacerbating fear of the developer’s cash situation and keeping markets on tenterhooks throughout their 30-day grace periods.
Though the amount was relatively modest, failure to pay would have undermined fragile hope in financial markets that China’s steady drip feed of policy stimulus was starting to stabilise the struggling property market and wider economy.
It would also have raised the risk of default and demands by holders of other dollar bonds to accelerate payments, bondholders and lawyers said.
Country Garden did not immediately respond to a request for comment. The person close to the company declined to be identified as they were not authorised to speak with media.
The developer’s share price was down roughly 3% on Tuesday, reflecting little change after Reuters reported it had wired the payments.
The Hang Seng Mainland Properties Index (.HSMPI) and China’s CSI 300 Real Estate Index (.CSI000952) lost more than 2% each as some investors took profit from the previous sessions’ gains.
Tuesday’s development comes after Country Garden on Friday won approval from onshore creditors to extend a private bond worth 3.9 billion yuan ($536 million).
Country Garden had not missed a debt payment obligation, onshore or offshore, until it failed to pay coupons on the two dollar bonds last month after slowing demand for new homes translated into tighter cash flow.
As well as the payments that were due on Tuesday, Country Garden has about $162 million of offshore bond interest payments due during the rest of the year, showed data from researcher CreditSights.
Country Garden’s predicament highlights the fragile state of China’s real estate sector, which accounts for roughly a quarter of the world’s second-largest economy and whose situation has deteriorated since a government campaign against high leverage began in 2021.
Making matters worse is a lacklustre post-pandemic economic recovery.
Services activity expanded at its slowest pace in eight months in August, a private-sector survey showed on Tuesday, as weak demand continued to dog the economy and stimulus measures failed to meaningfully revive consumption.
Latest stimulus included lowering existing mortgage rates and preferential loans for first-home purchases in big cities.
“With domestic demand weak and house prices on the slide in smaller Chinese cities in particular, there are still worries about the fragility of the real estate sector,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown, U.K.
“Stimulus efforts to increase mortgage lending are welcome but a much larger package of support is likely to be needed to restore more confidence in the sector, and put exposed property firms on a firmer footing.”
Reporting by Xie Yu in Hong Kong, Chi Xue in Shanghai and Siddarth S. in Bengaluru; Writing by Sumeet Chatterjee; Editing by Christopher Cushing
Our Standards: The Thomson Reuters Trust Principles.
The company logo of Chinese developer Country Garden is pictured at the Shanghai Country Garden Center in Shanghai, China August 9, 2023. REUTERS/Aly Song/File Photo Acquire Licensing Rights
HONG KONG/NEW YORK, Sept 4 (Reuters) – Country Garden’s (2007.HK) deal with creditors for an extension on onshore debt payments worth 3.9 billion yuan ($537 million) boosted shares in the developer on Monday and gave China’s crisis-ridden property sector some much-needed respite.
Shares in Country Garden jumped as much as 19% to their highest level since Aug. 10 and were set for the biggest one-day percentage rise since November. Hong Kong’s Hang Seng mainland properties index (.HSMPI) rose more than 9%.
But while investors in the company may be heaving sighs of relief, it remains to be seen whether a raft of government stimulus measures will soon help revive demand, ease the sector’s cash squeeze and lift the gloom over the wider financial system.
Beijing on Monday added to its series of policy measures in recent months to revive the world’s second-largest economy, approving the setting up of a special bureau to promote the development and growth of the private economy.
The private sector is responsible for 80% of new urban jobs, but has struggled to attract investment amid a frail economic recovery over the first half of the year, with business owners also constrained by weak domestic demand.
The worsening financial woes of Country Garden have only further highlighted the fragile state of the country’s real estate industry which accounts for roughly a quarter of the economy and has been in dire debt straits since 2021.
Considered financially sound compared to peers, China’s top private developer had not missed a debt payment obligation, onshore or offshore, until coupon payments on dollar bonds last month after slowing home demand hurt its cash flow.
Since then, Chinese authorities have rolled out a number of measures, the most significant being the lowering of existing mortgage rates and preferential loans for first-home purchases in big cities.
“We will see in the coming months if these supply-side measures are able to revive homebuying demand, which is crucial for the fate of China’s developers and their ability to handle their upcoming debt maturities,” said Tara Hariharan, managing director at global macro hedge fund NWI Management in New York.
She noted that Country Garden and other developers face payments for sizeable maturities this year.
In the deal reached after a vote on its proposal late on Friday, Country Garden is now allowed to repay the onshore debt in instalments over three years, instead of meeting its obligations by Sept. 2.
RESTRUCTURING TALKS
Country Garden has also wired interest payments tied to a 100 million Malaysian ringgit ($21.5 million) bond that was due on Sept. 2, said a source familiar with the matter, in another sign the company is striving to meet payment deadlines and avoid default.
The source asked not to be named due to the sensitivity of the matter.
The developer also has another impending debt payment challenge – the ending of a grace period on Tuesday for last month’s missed coupon payments worth a total of $22.5 million on two offshore dollar bonds.
That it was able to avert an onshore default with the extension deal has raised hopes it will be able to make the interest payments on those bonds, said three of its offshore creditors.
The bondholders declined to be named as they were not authorised to speak to the media.
After making the interest payments, the creditors said they expect Country Garden to enter into restructuring negotiations for its entire offshore debt to avoid a “hard default”, similar to what it did with the onshore creditors.
Country Garden did not immediately respond to a request for comment.
While China’s property industry may have gained some respite, some market participants said they plan to stay away from the sector until there is a rebound in home sales.
“We sold all our Chinese real estate stocks in April 2020 and haven’t bought back any since,” said Qi Wang, CEO of Hong Kong-based MegaTrust Investment. “Wouldn’t touch the private developers with a ten-foot pole right now.”
($1 = 7.2606 Chinese yuan = 4.6540 ringgit)
Reporting by Xie Yu in Hong Kong, Carolina Mandl in New York and Joe Cash in Beijing; Writing by Sumeet Chatterjee; Editing by Edwina Gibbs and Lincoln Feast
Our Standards: The Thomson Reuters Trust Principles.
BEIJING, Sept 4 (Reuters) – Chinese President Xi Jinping’s first major reform plans a decade ago were also his boldest, envisaging a transition to a Western-style free market economy driven by services and consumption by 2020.
The 60-point agenda was meant to fix an obsolete growth model better suited to less developed countries – however, most of those reforms have gone nowhere leaving the economy largely reliant on older policies that have only added to China’s massive debt pile and industrial overcapacity.
The failure to restructure the world’s second-largest economy has raised critical questions about what comes next for China.
While many analysts see a slow drift towards Japan-style stagnation as the most likely outcome, there is also the prospect of a more severe crunch.
“Things always fail slowly until they suddenly break,” said William Hurst, Chong Hua Professor of Chinese Development at University of Cambridge.
“There is a significant risk in the short term of financial crisis or other degree of economic crisis that would carry very substantial social and political costs for the Chinese government. Eventually there’s going to have to be a reckoning.”
China came out of its Maoist planned economy in the 1980s as a largely rural society, badly in need of factories and infrastructure.
By the time the global financial crisis hit in 2008-09, it had already met most of its investment needs for its level of development, economists say.
Since then, the economy quadrupled in nominal terms while overall debt expanded nine times. To keep growth high, China in the 2010s doubled down on infrastructure and property investment, at the expense of household consumption.
That has kept consumer demand weaker as a portion of GDP than in most other countries and concentrated job creation in the construction and industrial sectors, careers increasingly spurned by young university graduates.
The policy focus also bloated China’s property sector to a quarter of economic activity and made local governments so reliant on debt that many now struggle to refinance.
The pandemic, a demographic downturn and geopolitical tensions have exacerbated all these problems to the point that the economy has found it hard to recover this year even as China reopened.
“We’re at a moment when we are seeing some structural shifts, but we should have seen these coming,” said Max Zenglein, chief economist at MERICS, a China studies institute.
“We’re just beginning to be confronted with the reality. We’re in untested territory.”
The end of China’s economic boom will likely hurt commodity exporters and export disinflation around the world. At home, it will threaten living standards for millions of unemployed graduates and many whose wealth is tied up in property, posing social stability risks.
CRISIS VS STAGNATION
Aside from short-term solutions, which would likely only perpetuate debt-fueled investment, economists see three options for China.
One is a swift, painful crisis that writes off debt, curbs excess industrial capacity and deflates the property bubble. Another is a decades-long process in which China winds down these excesses gradually at the expense of growth. The third is switching to a consumer-led model with structural reforms that cause some near-term pain but help it re-emerge faster and stronger.
A crisis could unfold if the massive property market collapses in an uncontrolled way, dragging the financial sector with it.
The other high-stress point is local government debt, estimated by the International Monetary Fund at $9 trillion. China promised in July to come up with a “basket of measures” to address municipal debt risks, without detailing.
Logan Wright, a partner at Rhodium Group, says Beijing has to decide which portion of that debt to rescue, as the amount is too large to provide full guarantees of repayment, which the market currently regards as implicit.
“Crisis is going to occur in China when government credibility falters,” he said.
“When all of a sudden funding is cut off for the remaining investments that seem subject to market risk, that’s a huge moment of uncertainty in China’s financial markets.”
But given state control of many developers and banks and a tight capital account that limits outflows into assets abroad, that is a low risk scenario, many economists say.
Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis, expects there would be plenty of buyers if Beijing consolidates debt given limited investment alternatives.
“I am more in the slow growth camp,” she said. “The more debt is piled up for projects that are not productive, the lower the return on assets, particularly public investment, and that really means that China cannot grow its way out.”
Avoiding a crisis by extending the adjustment period, however, has its own stability risks with youth unemployment topping 21% and around 70% of household wealth invested in property.
“One of China’s biggest success stories, building a strong middle class, is also becoming its biggest vulnerability,” said MERICS’ Zenglein. “If you look at it from the perspective of a younger person, you are now at risk of being the first post-reform generation whose economic wellbeing might hit a wall. If the message is tighten up your belts and roll up your sleeves, that’s going to be kind of a hard sell.”
REFORMS, THIS TIME?
The third path, actively switching to a new model, is considered very unlikely, based on what happened to Xi’s 60-point programme.
Those plans have barely been mentioned since 2015 when a capital outflows scare sent stocks and the yuan tumbling and engendered an official aversion to potentially disruptive reforms, analysts say.
China has since backed away from major financial market liberalisation while plans to rein in state behemoths and introduce universal social welfare never quite materialised.
“Right now is a time in which there’s a potential for the train to change direction to a new model, and I think there’s appetite to do that,” said Hurst.
“But at the same time there’s a great fear of the short-term political and social risk, especially of provoking an economic crisis.”
Additional reporting by Liangping Gao and Kevin Yao; Graphics by Kripa Jayaram; Editing by Marius Zaharia and Sam Holmes
Our Standards: The Thomson Reuters Trust Principles.
BENGALURU, Sept 1 (Reuters) – The recent downturn in global property prices is mostly over with average home prices in major markets now expected to fall less than anticipated at the start of the year and rise into 2024, according to a Reuters poll of property analysts.
Double-digit price falls that the analysts forecast earlier this year due to rising mortgage rates haven’t materialised in full as higher household savings, tight supply and rising immigration limited declines.
Sharply higher mortgage rates, as a result of more than a year of interest rate rises by key central banks, haven’t affected everyone, either.
Many home owners who locked in cheap mortgages during a long period of near-zero rates, particularly in the United States, have decided to stay put. That has restricted supply and housing market activity.
But that’s more bad news for aspiring first-time homebuyers left on the sidelines for years by tight supply and priced out during the COVID pandemic when existing home owners outbid them, pushing up house prices at double-digit annual rates.
The latest poll results – particularly for economies with the fastest house price inflation in recent years such as the U.S., Canada, New Zealand and Australia – challenge the assumption the next move from most central banks will be to cut rates.
Indeed, much of the optimism around the unexpected early stabilisation in these markets has stemmed from speculation interest rates have topped out and that as soon as the first half of next year, they’ll be coming down again.
“Probably over the last two months there has been a little bit too much positive thinking around the impact of a peak rates scenario. I think we haven’t really felt the full impact yet of higher rates. Fixed rate mortgages have meant many owners of property are being kind of shielded from the impacts,” said Liam Bailey, head of research at Knight Frank.
“I think the reality is you’ve got very low supply and house building volumes in most markets because of COVID disruption and supply chain disruption … You’ve also got quite strong demand in most Western markets. The fundamental point is strong demand meets weak supply.”
That was already a serious challenge across global housing markets before the pandemic, which only a few markets like India missed.
The Aug 14-31 Reuters poll of over 130 housing analysts covering property markets in the U.S., Britain, Germany, Australia, New Zealand and India showed analysts broadly upgrading their forecasts for this year and next. China is a notable exception to the optimism.
Average U.S. house prices were forecast to stagnate this year and next. In the May and March polls, 2023 values were forecast to fall 2.8% and 4.5%, respectively.
New Zealand and Canadian home prices, which soared 40-50% during the pandemic, were predicted to fall around 5% this year and then rise about 5% and 2%, respectively, in 2024.
Those were upgrades from the 8%-9% drop expected in 2023 and a 2%-3.4% rise next year in the last poll.
In India, which did not have a pandemic boom, home prices are set to rise steadily over the coming years.
Average prices in the German housing market were forecast to fall 5.6% this year and flatline in 2024. UK home prices will drift down a modest 4% this year with no growth next year, according to the poll.
Affordability is set to remain a problem globally.
Overall, a majority of respondents, 55 of 103, who answered a separate question said purchasing affordability for first-time homebuyers would worsen over the coming year. The remaining 48 said improve.
“Mortgage rates have continued to rise, and that is putting increased pressure on affordability. Sales volume is low, which obscures exactly how bad the pressure is on home prices,” said Brad Hunter of Hunter Housing Economics.
But with demand for housing outstripping supply, average rents were expected to rise and rental affordability to worsen.
A near two-thirds majority of analysts, 65 of 101, who answered an additional question said rental affordability would worsen over the coming year. The remaining 36 said improve.
(For other stories from the Reuters Q3 housing market polls:)
Reporting by Hari Kishan and Sarupya Ganguly; other reporting and polling by Anitta Sunil, Maneesh Kumar, Prerana Bhat, Jonathan Cable, Anant Chandak, Sarupya Ganguly, Indradip Ghosh, Vivek Mishra, Milounee Purohit, Susobhan Sarkar, Devayani Sathyan and Vijayalakshmi Srinivasan; Editing by Ross Finley and Mark Potter
Our Standards: The Thomson Reuters Trust Principles.
Carpenters work on building new townhomes that are still under construction while building material supplies are in high demand in Tampa, Florida, U.S., May 5, 2021. REUTERS/Octavio Jones Acquire Licensing Rights
NEW YORK, Aug 29 (Reuters) – U.S. housing prices showed further signs of stabilizing in June, according to two reports out Tuesday that signaled the lengthy run of softening sales prices may be bottoming out.
Home purchase prices increased by 3.1% year-over-year in June, compared with a 2.9% rise in May, marking the first pick-up in annual price growth since February 2022, data from the Federal Housing Finance Agency showed. A separate national price index from S&P CoreLogic Case-Shiller was unchanged from a year earlier in June after posting year-over-year declines in the previous two months.
Both reports showed prices rose modestly month-over-month.
For more than a year, rising mortgage rates on the back of aggressive interest rate hikes by the Federal Reserve have cut into sales volumes as more homeowners forgo selling their houses. The limited inventory has helped keep prices high as well, although annual price growth has moderated significantly from rates around 20% in early 2022.
House prices rose 3.0% between the second quarters of 2022 and 2023, FHFA said.
“U.S. house prices appreciated at a slightly higher rate in the second quarter amid low inventory,” said Anju Vajja, principal associate director in FHFA’s Division of Research and Statistics. “While prices in a number of Western states continued to decline year-over-year, house prices rose in all states quarter-over-quarter.”
Craig Lazzara, managing director for S&P DJI, said the findings point toward a recovering housing market, even amid higher mortgage rates. The average interest rate for a 30-year mortgage has shot above 7% to the highest level in more than two decades.
“We recognize that the market’s gains could be truncated by increases in mortgage rates or by general economic weakness, but the breadth and strength of this month’s report are consistent with an optimistic view of future results,” he said.
FHFA’s data showed June’s year-over-year gains were strongest in the East North Central and New England regions, up by 5.4% and 6.8%, respectively. On a city basis, the Case-Shiller data showed Chicago and Cleveland experiencing the greatest price accelerations.
Reporting by Amina Niasse; additional reporting by Safiyah Riddle;
Editing by Andrea Ricci and Leslie Adler
Our Standards: The Thomson Reuters Trust Principles.