WASHINGTON, June 28 (Reuters) – U.S. consumer confidence dropped to a 16-month low in June as worries about high inflation left consumers to anticipate that the economy would slow significantly or even slide into recession in the second half of the year.
Despite the gloomy outlook, consumers showed little sign of cutting back on spending, with buying plans for motor vehicles and other big ticket items like refrigerators and washing machines increasing, the survey from the Conference Board on Tuesday showed. But fewer consumers compared to April intended to go away on vacation at home or abroad, reflecting record high gasoline prices and expensive airfares.
The economy is on recession watch as the Federal Reserve aggressively tightens monetary policy to tackle inflation. For now, it continues to grow, with other data on Tuesday showing the goods trade deficit again narrowing significantly in May as exports hit a record high.
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“Right now we are at an inflection point in the economy, where actual spending and economic activity is still positive, however, consumer confidence and financial conditions, especially interest rates, are indicating a slowdown ahead,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina.
The Conference Board’s consumer confidence index dropped 4.5 points to a reading of 98.7 this month, the lowest since February 2021. Consumers’ assessment of current business and labor market conditions were little changed. But their short-term outlook for income, business and labor market conditions were the weakest since March 2013, which the Conference Board said were “suggesting weaker growth in the second half of 2022 as well as growing risk of recession by year end.”
Consumer fears of a recession could become self-fulfilling. The University of Michigan’s survey last week showed consumer sentiment plunging to a record low in June.
The Conference Board survey places more emphasis on the labor market, which remains tight, but consumers are feeling the inflation pain. National gasoline prices averaged just above $5 per gallon for most of June, before slipping back to around $4.88 per gallon as of Tuesday, according to data from AAA.
“Consumers hate inflation and this is depressing consumer confidence via the expectation channel even as households see labor market conditions as strong,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.
The Conference Board survey’s so-called labor market differential, derived from data on respondents’ views on whether jobs are plentiful or hard to get, ticked up to 39.7 from a reading of 39.5 in May. This measure correlates to the unemployment rate from the Labor Department.
There were 11.4 million job openings at the end of April, with nearly 2 openings per every unemployed person.
Stocks on Wall Street were mostly lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
INFLATION EXPECTATIONS JUMP
Consumers’ inflation expectations over the next 12 months jumped to a record high 8.0% from 7.5% in May.
The Fed this month raised its policy rate by three-quarters of a percentage point, its biggest hike since 1994. The U.S. central bank has increased its benchmark overnight interest rate by 150 basis points since March.
Consumers still intend to keep on spending on goods even as they worry about inflation. The share of consumers planning to buy a motor vehicle over the next six months rose. More consumers planned to buy major household appliances, including dryers and vacuum cleaners.
But vacation is not on the cards for many, which could slow consumer spending and economic growth in the second half.
Plans to buy a home were unchanged as borrowing costs increase further and house prices remain elevated amid a shortage of entry-level homes.
A separate report on Tuesday showed the S&P CoreLogic Case-Shiller national home price index increased 20.4% on a year-on-year basis in April after surging a record 20.6% in March. Hefty price gains were recorded in Tampa, Miami and Phoenix.
Signs that house price inflation has probably peaked were reinforced by a third report from the Federal Housing Finance Agency showing home prices increased 18.8% in the 12 months through April after accelerating 19.1% in March.
Nevertheless, the economy is chugging along. A fourth report from the Commerce Department showed the goods trade deficit contracted 2.2% to $104.3 billion in May, suggesting that trade could contribute to economic growth this quarter for the first time in nearly two years. read more
A record trade deficit weighed on the economy in the first quarter, resulting in gross domestic product declining at a 1.5% annualized rate. Trade has subtracted from GDP for seven straight quarters. Growth estimates for the second quarter range from as low as a 0.3% rate to as high as a 2.9% pace.
Wholesale inventories increased 2.0% in May, while stocks at retailers climbed 1.1%.
“Exports and inventories are still rising in May at least, and this means the recession clouds offshore will have to sit on the horizon for another month,” said Christopher Rupkey, chief economist at FWDBONDS in New York.
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Reporting by Lucia Mutikani; Editing by Paul Simao and Chizu Nomiyama
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LONDON, June 28 (Reuters) – The war in Ukraine is making it hard for even unsanctioned Russians to sell exclusive residential property in Britain, adding to a shortage of supply that has helped drive up house prices in prime locations, real estate sources say.
Russian oligarchs, Middle Eastern oil barons and billionaire Chinese entrepreneurs have been on a spending spree on London real estate over the past three decades, snapping up trophy homes and high-end commercial property.
But the four-month-old invasion of Ukraine, which Russia calls a special military operation, has prompted Britain to slap sanctions on more than 1,100 Russians it says have ties to the Kremlin, spreading unease and freezing house sales in so-called Londongrad, agents say.
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“There have definitely been a number of transactions that have not gone through, two in excess of 40 million pounds ($49 million),” said Charlie Willis, CEO of property broker The London Broker, adding that in both cases, the buyers were advised not to proceed “just because the seller was originally Russian”. He declined to give further details.
THE BIG SQUEEZE
A widespread shortage of available properties has pushed up prime London prices by 4.7% since the invasion, according to agents Benham & Reeves, although prices in Belgravia and Knightsbridge – popular locations for Russians – have climbed slightly less, at 3.3%.
“The market’s being fuelled by a lack of supply,” said Geoff Garrett, director at mortgage broker Henry Dannell.
The number of prime central London residential sales was down 30% between March and May compared with last year, though still up on pre-pandemic levels, according to property data firm LonRes.
Estate agent Aston Chase estimates there are over 150,000 Russians living in London who between them own eight billion pounds of real estate assets, businesses, and other investments in Britain.
But Mark Pollack, Aston Chase’s co-founder, says wealthy Russians are increasingly cautious about being caught up in the web of sanctions.
“Russians aren’t buying (in the same way) and they are not selling, not necessarily because they don’t want to in some instances, but because they probably can’t or it might be sensible to hope the … dust settles,” he said.
Britain in February scrapped its so-called “golden visas” for wealthy investors and last month announced plans for a new economic crime bill, intended in part to identify the owners of property in Britain and combat illicit finance, although critics say loopholes remain.
Henry Sherwood, managing director of The Buying Agents, which focuses on properties starting at around five million pounds, said the crack down had helped dash hopes the war and sanctions might lead to a flurry of cut-price Russian sales.
At the beginning of the war, “we had people ringing up saying: ‘Have you got any Russians selling?’,” he said.
But he added: “The more discreet don’t want to have anything to do with them. Our buyers don’t want to be associated with firesales – they don’t want to get into a transaction that will never happen.”
One unsanctioned Russian failed to secure three lawyers before finding one willing to help him sell an expensive London property, a senior executive at a property development firm on the other side of the deal told Reuters.
Russian tenants including students are also finding it hard to transfer funds due to sanctions, forcing them to withdraw from the market in London, said Marc von Grundherr, director at Benham & Reeves.
Unprecedented Western sanctions on Moscow, the withdrawal from Russia of scores of Western companies and pressure on London’s advisory companies to cut links with Russian clients have driven some Russian buyers to friendlier property hotspots such as Dubai or Istanbul. read more
One Russian client, Pollack said, had pulled out of buying an 18 million pound London apartment when Russian tanks rolled into Ukraine in February because they were nervous about the political rhetoric in Britain. They still want a London home, but have halved their budget, he said.
But buyers from other regions are helping to keep the London market buoyant.
International buyers have accounted for at least a third of property purchases in prime central London locations in every quarter between 2011 and 2019, according to data from Statista.
Vic Chhabria, managing director at agent London Real Estate Office, which specialises in new constructions as well as high-rise condominiums and luxury homes, said his appointment diary was full, with most interest from buyers in Singapore, Hong Kong and Mumbai willing to spend between two and 20 million pounds.
A prolonged war, tighter regulation, rising interest rates, raging inflation and brutal stock market drops could yet take the heat out of some of that growth, agents added.
“The property market has been flying over the course of the last two to three years,” said Garrett. “All of these cycles have to slow.”
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Editing by Mark Potter
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LONDON, June 21 (Reuters) – The North Sea’s biggest oil and gas producer, Harbour Energy (HBR.L), has told the British government that Britain’s planned windfall tax on the energy sector will shrink the company’s investment in the country.
With oil and gas prices soaring and households feeling the hit from higher prices across the board, Britain last month announced plans to introduce a 25% windfall tax on oil and gas producers’ profits, with a view to raising $5 billion. read more
A meeting between representatives of oil and gas producers in the British North Sea, including Harbour, and Treasury officials is scheduled to take place on Thursday in Aberdeen, Scotland, a Harbour spokesperson and two industry sources said.
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“We must reassess our strategy and plans in the UK which will, I am afraid, lead to lower investment, not more,” Chief Executive Linda Cook said in an undated letter seen by Reuters to British finance minister Rishi Sunak.
Britain is allowing the impact of the levy to be offset against fresh investments in oil and gas projects. read more
But Cook said the incentive does not help companies like Harbour that have invested in new projects such as the Tolmount gas field, which increases UK gas output by 5%.
Cook said the levy hurt so-called independent producers such as Harbour disproportionately more than oil majors active in the British North Sea, such as BP (BP.L) or Shell (SHEL.L).
A Harbour Energy spokesperson said: “we do envisage a significant impact on our business, our strategy, and our ability to invest in our current and future projects in the UK.”
Oil and gas producers such as Harbour typically hedge more than half of the volumes they sell in advance to lock in a price floor, often to satisfy covenants with lenders. This means that they can miss out on price spikes in the open market.
Cook asked Sunak to change the tax plan to reflect past investments, decommissioning spending as well as to scrap the levy by the end of next year and put in a higher profit threshold for companies affected by the tax.
Harbour’s share price has slumped around 19% since the plan was announced on May 26.
“Our existing and prospective shareholders … are now actively questioning the future of our assets in the UK and struggle to evaluate their remaining potential given the uncertain and unpredictable fiscal environment,” Cook said.
“They are also, rightly, questioning our strategy to remain a large UK oil and gas producer and continuing to invest in the country.”
Harbour’s biggest shareholders include private equity firm EIG, which holds a 36% stake, and Singapore sovereign wealth fund GIC and Fidelity, which hold around 5% each, according to Refinitiv Eikon data.
The Treasury had no immediate reply to a request for comment.
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Reporting by Ron Bousso
Writing by Shadia Nasralla
Editing by Jonathan Oatis and Mark Potter
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BEIJING, June 16 (Reuters) – China’s state planner said on Thursday it had approved 10 fixed-asset investments worth 121 billion yuan ($18.1 billion) in May, a more than six-fold jump from April, as policymakers seek to get economic growth back on track after a COVID-induced slump.
Data on Wednesday suggested activity in the world’s second-largest economy is beginning to pick up again in some sectors after widespread COVID-19 lockdowns in April and early May, but the outlook remains uncertain, particularly for cities like Beijing which are still trying to bring caseloads down to zero.
Most private economists believe China’s economy contracted in April-June after growing 4.8% in the first three months. The government has vowed to achieve positive growth in the second quarter. read more
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“We will ensure reasonable economic growth in the second quarter to provide a firm foundation and conditions for the economy in the second half of the year,” Meng Wei, spokeswoman at the National Development and Reform Commission (NDRC), said at a news conference on Thursday.
From January to May, the NDRC approved a total of 48 fixed-asset investment projects worth a total of 654.2 billion yuan, more than 80% of the 775.4 billion yuan of projects in infrastructure, power, mining, water and manufacturing approved for the whole of 2021.
With the spread of the highly transmissible Omicron variant in China this year, stringent curbs have been imposed in many cities, such as Shanghai and Beijing, including varying degrees of lockdowns, disrupting local economies.
The Chinese capital Beijing, wrestling with its most serious outbreak since late April, has seen its economy cool sharply, even underperforming the national economy.
In January-May, the city’s industrial output fell 12.5% from a year earlier, data from the local statistics bureau showed on Thursday, worse than China’s overall 3.3% growth during that period.
With dining-out and some entertainment services suspended in May, Beijing’s retail sales in the first five months shrank 7.7%, versus the 1.5% drop nationwide. The city’s catering revenue declined 13.0%.
In May alone, retail sales dived 25.73% on year while property sales by floor area dropped 23.1%, according to Reuters calculations based on the official data.
The NDRC also will give local governments more leeway in the use of funds they raise through special bonds, Meng said.
China will include high-tech infrastructure projects, or the “new infrastructure” in the scope of use of funds raised by the local government special bonds for the first time, she said.
PRIVATE INVESTMENT
On Wednesday, state media quoted the cabinet meeting as saying China will guide financial institutions to issue more long-term loans and strengthen support for private investment.
China will step up support for private investment, selecting a batch of major infrastructure projects to attract private investors, the cabinet said.
“Private investment is of great significance when trying to maintain a steady growth rate in overall investment,” Meng said.
Since 2012, when official statistics for private investment began, the proportion of private investment has always stayed above 55% of overall investment.
Starting from this year, the growth rate of private investment has slowed due to complex and volatile international factors as well as domestic COVID outbreaks, Meng said.
From January to May, private investment increased by 4.1%, accounting for 56.9% of overall investment, Meng said, slowing from 5.3% in the first four months.
The NDRC will strengthen financing support for private investment, she said.
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Reporting by Shen Yan, Ryan Woo and Ellen Zhang; Editing by Christopher Cushing and Kim Coghill
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COPENHAGEN, June 15 (Reuters) – Toymaker Lego on Wednesday said it will invest more than $1 billion in a factory in the United States to shorten supply chains and keep up with growing demand for its coloured plastic bricks in one of its biggest markets.
The factory in Chesterfield County, Virginia, will be the Danish company’s second in North America and seventh worldwide, after it announced a new factory in Vietnam last year. read more
The investment is in line with a decade-old strategy of placing production close to its key markets, which the company says has been beneficial as the global retail industry faces pandemic-related supply chain issues. The plant will also be carbon neutral.
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“Our strategy to be close to our core markets has only been confirmed recently,” Chief Operations Officer Carsten Rasmussen told Reuters.
The toy market is characterized by large seasonal fluctuations, while more than half of the company’s products in stores are new items, he said.
“It’s difficult to predict what children and adults want to buy for a birthday or for Christmas. So the reaction time is very worthwhile to make sure we have the right products on the shelves,” said Rasmussen.
The factory will be powered by renewable energy produced at an onsite solar park, the company said.
Lego has pledged to replace oil-based plastic bricks with ones made from sustainable materials by the end of the decade.
The 160,000-square-meter factory is scheduled to be operational in the second half of 2025 and will employ more than 1,760 people. Lego closed a smaller factory in Connecticut in 2006, and the U.S. market is currently supplied from a factory in Mexico.
“The U.S. market has done really well in recent years. We see huge potential in the United States and throughout the Americas,” said Rasmussen.
The company now employs around 2,600 people in the United States, where it operates 100 stores.
The family-owned company outpaced growth in the toy industry last year, with sales growing 27% to 55.3 billion Danish crowns ($7.8 billion). The company is also investing in increasing capacity at existing factories in Europe and China. read more
Lego produces roughly 100 billion bricks each year and employs around 24,000 people worldwide.
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Reporting by Jacob Gronholt-Pedersen; Editing by Bernadette Baum and Mark Porter
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BERLIN, June 3 (Reuters) – Germany’s economy ministry has drawn up plans to foster the start-up scene in Europe’s largest economy with a batch of measures including an injection of public funds and steps to prod pension funds to invest in venture capital.
The ministry, which wants the cabinet to adopt the plans in the summer, outlined its strategy in a 28-page document which included provisions to bolster start-up funding with 10 billion euros ($10.75 billion) in new public funding through to 2030.
“Together with private investors, it (the government) wants to mobilise up to 30 billion euros in private and public capital for Germany as a VC location,” the ministry added in the draft, with reference to venture capital (VC).
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The government would aim to attract investment capital to Germany by granting venture capital funds sales tax exemptions. The plans also envisage a minimum investment quota for public and private pension schemes in venture capital funds.
“These young companies are the drivers of economic dynamism and renewal,” the ministry said of start-ups, adding that they are “important for further development and long-term competitiveness of our economy.”
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Pigs are seen at a farm outside Hanoi, Vietnam June 28, 2019. Picture taken June 28, 2019. REUTERS/Kham
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HANOI, June 1 (Reuters) – Vietnam said on Wednesday it had successfully developed a vaccine to administer to pigs to fight African swine fever, with the aim of becoming the first country to commercially produce and export it.
African swine fever, one of the most devastating livestock diseases, was first detected in Vietnam in February 2019 and forced the country to cull around 20% of its hog herd last year.
It originated in Africa before spreading to Europe and Asia and has killed hundreds of millions of pigs globally. African swine fever is harmless to humans.
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“This is a milestone of the veterinary industry,” deputy agriculture minister Phung Duc Tien said in a statement.
“With immunity lasting six months, the vaccine will be a shield for hog-raising industry and pig production globally.”
The vaccine has been in development since November 2019 in partnership with United States experts, with five clinical trials held.
Its safety and efficacy was confirmed by the Agricultural Research Service under the U.S. Department of Agriculture, Tien said.
“This success opens great expectations and the room to export African swine fever vaccine produced in Vietnam is huge,” Tien added.
He did not provide a timeframe for when the vaccine could be exported or estimate of Vietnam’s production capacity.
Although the swine fever outbreak has subsided in Vietnam, allowing farmers to rebuild hog herds, the virus is still hurting farms in some countries.
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Reporting by Phuong Nguyen; Editing by Martin Petty
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BEIJING/SINGAPORE, June 1 (Reuters) – China’s army of metal processors and traders has flipped from buyers to sellers amid a sharp downshift in economic activity in the world’s top manufacturer, heralding a potential warning sign for steel, aluminium and other key industrial commodities.
Chinese buyers drove the global surge in metals prices from mid-2020 through end-2021 as they scoured the world for ores and metals to feed its mammoth industrial engine and build inventories in anticipation of further price rises.
That order flow has reversed since March, as recurring outbreaks of COVID-19 have triggered extended factory and store shutdowns, choking purchases of metals-intensive products from cars to appliances, and pressuring prices of manufacturing inputs.
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Metals futures prices illustrate the selling pressure. Futures forward curves for aluminium, zinc, steel rebar and iron ore show prices trending steadily lower through the rest of 2022.
Weakness in the construction sector – which accounts for roughly half of all steel and around 30% of aluminium used in China – has further undermined metals sector sentiment, prompting some processors and trading firms to sell inventories into a weakening domestic market rather than store it for later sale to end-users.
“Downstream demand had been postponed again and again by each round of the pandemic outbreak across the country. Some people said it could pick up in July, but the rainy season will arrive then,” said Qi Xiaoliang, a Beijing-based steel trader.
Unwilling to hold onto his depreciating metal stockpile until demand recovers, Qi has started to sell off inventories at 150-200 yuan ($22.56-30.09) below his purchasing costs.
Other producers of intermediate metal products have followed suit, reversing typical trade patterns and clouding the near-term outlook for metals demand in China.
“The issue is complex, since China is a net exporter of some metals, such as steel and aluminium, and net importer of others, such as nickel, copper and battery metals,” John Johnson, CEO of CRU China told Reuters.
“Short-term changes in demand and relative prices may change these flows temporarily at the margin, but China is unlikely to change its longer-term strategy of adding value to exports.”
STUNTED STIMULUS
Beijing has unveiled a series of measures from cuts to benchmark lending rates to allowing delays to loan repayments to soften the blow from the economic slowdown, but its commitment to a zero-COVID policy has precluded more direct steps to revitalise economic activity.
“Supportive policy measures in China are yet to offset stringent COVID-19 measures. Lending and key property indicators remain subdued,” analysts with ANZ Research said.
Lockdowns and movement restrictions have curtailed factory and construction activity just when it typically peaks, depriving metals producers of a key window to sell their products.
Output of several key metals-intensive products from shipping containers to refrigerators has fallen behind 2021’s production pace, and looks set to stay weak as long as movement restrictions remain in place.
Similarly, construction sites that are typically abuzz in the run-up to summer are now largely desolate as workers stay home.
The property sector’s credit crunch has also stifled building activity, with new construction starts falling 26.3% year-on-year in the first four months. read more
That’s resulted in reduced demand for metals in appliances, plumbing and wiring. The amount of copper used in appliances is set to fall around 2% in 2022 from 1.79 million tonnes last year, according to Che Guojun, analyst with state-backed consultancy Antaike.
Vehicle production and sales have slumped in the world’s top auto market. As a result, auto sheet output at leading producer Beijing Shougang Co Ltd (000959.SZ) fell 17.6% in January-April from the same period a year earlier.
Reflecting this downturn in demand, steel product inventories have bucked their traditional decline since the end of the Lunar New Year holiday, instead climbing 9.4% from a year ago as of May 19, according to Reuters calculations based on Mysteel consultancy data.
In response to the downbeat activity acrossChina, Goldman Sachs lowered its 2022 growth forecast to 4%, compared with China’s official target of around 5.5%.
“Although infrastructure stimulus should be overall positive for commodity demand, we believe its net impact should be slightly smaller… as projects could be less commodity intensive than in the past,” the bank said in a recent note to clients.
BRIGHT SPOT
While most major industrial commodities are under pressure from China’s slowing usage, analysts remain more upbeat on certain specialist products.
“New energy vehicles and batteries still remain high growth and awaiting demand resumption… sentiment towards new energy sector is still promising,” said Yu Mengxue, analyst with Shanghai Dalu Futures.
Others anticipate demand will pick up later in the year on Beijing’s vow to stabilise the economy.
“Government support has worked in the past, the exact benefit is hard to pinpoint but we are hopeful,” said Malan Wu, research director at Wood Mackenzie.
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Reporting by Min Zhang in Beijing and Gavin Maguire in Singapore; Editing by Sonali Desai
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BENGALURU, May 31 (Reuters) – Burning U.S. house price inflation will cool to 10%, half its current rate this year, and slow further over the next two as already very expensive homes and climbing mortgage rates sideline more prospective homebuyers, a Reuters poll found.
Supported by near-zero borrowing costs and a rush by existing homeowners to find more space, average U.S. house prices have soared by over one-third since the pandemic started. But that unexpected boom is petering out already. read more
The Federal Reserve has raised its key interest rate by a cumulative 75 basis points since March, with more expected this year and next, pushing up the key 30-year fixed mortgage rate above 5% in April and to its highest in more than a decade.
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The May 10-30 poll of 28 property analysts showed U.S. house prices would rise 10.3% on an average this year based on the Case/Shiller index. That would be half their current pace of around 20%, the fastest since comparable records began in 2001.
“The rise in home prices has been staggering, and we do expect a significant slowdown going forward, particularly in the wake of a near-doubling of mortgage rates,” said Brad Hunter, head of consultancy Hunter Housing Economics.
“Young families are already struggling to find a single-family home they can afford, and the increase in mortgage rates will only worsen this problem.”
House price rises were predicted to slow further to 4.4% next year and 3.9% in 2024, down from 5.0% and 4.1% in the March poll. However, only a handful of contributors predicted prices would fall next year or in 2024.
The U.S. housing outlook was better compared to some other markets, including Australia and New Zealand, where prices were predicted to fall modestly at some point over the coming three years after rising exponentially too. read more
But the predicted increase in this year’s house prices was significantly higher than inflation and wage growth forecasts in a separate Reuters poll, meaning affordability is unlikely to improve anytime soon, especially for the first-time homebuyers.
Indeed, nearly 90% of analysts, 26 of 29, who answered a separate question said affordability for first-time homebuyers would either worsen or significantly worsen over the next two years. Only three said it would improve.
With consumer inflation at around a four-decade high and rising interest rates and 30-year mortgage rates, housing market activity has already slowed sharply. read more
“Millennials have not seen the 30-year above 5% for more than a month in their adult lives,” said Matthew Gardner, chief economist at Windermere Real Estate.
“The impact of higher rates will lower sales and new housing starts, and price growth…will slow.”
Meanwhile, existing home sales, which make up about 90% of total sales and declined to a near two-year low of 5.61 million units last month, was predicted to fall further to reach 5.34 million units by the second quarter of next year. read more
(For other stories from the Reuters quarterly housing market polls:)
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Reporting by Indradip Ghosh and Prerana Bhat; Polling by Vijayalakshmi Srinivasan and Shrutee Sarkar; Editing by David Gregorio
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May 30 (Reuters) – In Toronto’s far-flung suburbs, just a few months ago a typical three-bedroom house would have fetched 40 offers on bidding night and sold well over the asking price. Now, home-buyers have become hard to find.
“You’re not getting the bidding wars anymore,” said Tim Keung, chief executive of TimSold Real Estate, a local agency.
“A lot of buyers are… sitting on the sidelines, waiting for this big correction to happen.”
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They are not alone. A decade-long boom in housing prices from the United States to Europe and Asia is facing its first real test as borrowing costs rise and high inflation eats into households’ budgets.
Beyond Toronto, home prices are already falling in some of the places that have seen the biggest appreciation, such as China, New Zealand and parts of Australia.
Growth has slowed in Singapore and South Korea and volumes are dwindling in the United States and Poland.
Lenders and regulators from across the most industrialised nations have warned that inflated home prices may now stagnate or fall – in some cases by as much as a quarter. read more
While every market is different, they nearly all have one thing in common: a surge in the cost of borrowing as central banks around the world raise interest rates to fight inflation.
The average rate on a 30-year fixed-rate mortgage in the United States, a barometer for the rest of the world, has surged from just 2.7% in late 2020 to 5.5% now, the highest level since 2008, according to the Mortgage Bankers Association.
This is below the levels that prevailed in the 2000s but the sheer pace of change in fixed and variable rates is straining buyers and owners already struggling with a higher cost of living.
This threatens to prick property bubbles that have been financed by cheap credit over the past decade and grew even bigger during the pandemic, when some people saved more and looked for bigger abodes.
“The high real estate prices and rising mortgage rates are increasingly a problem for the affordability of residential property,” said Joerg Utecht, chief executive of German mortgage broker Interhyp.
Swiss bank UBS ranks Frankfurt in Germany as the city with the biggest bubble risk, followed by Toronto, Hong Kong and Munich, Germany, based on factors such as the relationship between prices, incomes and rents.
Similarly, German bank LBBW estimates that home prices in Europe’s largest economy have risen by 20%-25% more than demand and supply would justify since 2015, meaning they could fall by that much if borrowing costs go back to where they were then.
German borrowers were paying just 1% for a 10-year fixed rate mortgage last year but this has risen to 2.5%, the highest level since 2014, and could well hit 3% by the end of the year, according Interhyp.
Economists polled by Reuters have already started cutting their forecast for home price growth in Germany for the next two years. read more
FEEL THE HEAT
Homeowners with a variable-rate mortgage are also starting to feel the heat.
In Poland, where such loans are the norm and the central bank has raised rates from 0.1% to 5.25% since October to stem now double-digit inflation, the government is stepping in to help borrowers via payment holidays. read more
In the northern town of Rotmanka, 31-year-old office worker Maciej Kawka has seen the monthly mortgage payments on his small flat rise by 18% since he took out the mortgage in 2018. He now pays 1,650 zlotys ($384.62) a month. However, he expects payments to increase to 1,800-1,900 zlotys when the latest two central bank hikes are factored in, further pressuring his finances which are also being squeezed by surging energy and food prices.
“Our budget will be much tighter: no holidays, nothing that goes beyond day-to-day life,” Kawka, who lives with his wife and daughter, said. “But if (rates) keep rising I don’t know what will happen.”
Elsewhere, homeowners are locking in current rates, fearing further surges.
Dennis Willeke, a 35-year-old firefighter, has secured a 2.15% fixed rate for the next 10 years on the house where he lives with his wife and two children in the western German town of Neukirchen-Vluyn.
“We have rushed to refinance because I think it will rise still,” he said.
In New Zealand, American Lee Stewart and his wife are anxious about a repeat of the 2007-09 property crash, when millions of homes were repossessed in the United States alone and the couple ended up selling theirs at a loss.
Spooked by the rise in rates, which started in New Zealand earlier than in most other countries, Stewart has fixed his own mortgage costs for three years.
“Small changes in that percentage make a big difference… to somebody who has a pretty big loan,” the 40-year-old said.
Yet analysts don’t expect a repeat of the collapse that started the global financial crisis 15 years ago.
First, the share of variable-rate loans has shrunk to just 10% of all mortgage applications in the United States and 20% of all household debt in the euro zone in just over a decade.
Second, with the notable exception of China, most countries are still facing housing shortages, which are now exacerbated by a lack of labour and materials due in part to the after effects of lockdowns during the pandemic. Those countries include the United States, Germany and Britain. read more
This was seen putting a floor on prices.
But Canada and New Zealand show how fast that can change when higher rates cool demand.
“Right now, if there are 10 things on a buyer’s wish list and the house doesn’t have eight of them, they’re just going to pass,” said Brad Goetz, an agent at Canada’s Right at Home Realty. “Where prior to this, it was just like, ‘Hey, it has four walls and a kitchen and a bathroom. We’re good.'”
($1 = 4.2900 zlotys)
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Reporting by Francesco Canepa in Frankfurt, Julie Gordon in Ottawa, Alan Charlish in Warsaw, Lucy Craymer in Wellington, Wayne Cole in Sydney, Chen Lin in Singapore, Choonsik Yoo in Seoul, Anne Karaunen in Helsinki and Simon Johnson in Stockholm
Editing by Susan Fenton
Our Standards: The Thomson Reuters Trust Principles.