PART I: The Global Macro Factors
Time and again, I am asked: What about the future? What can you tell me about what will happen tomorrow? Next week? Next month? Next year?
In this series, I will be doing just that and forecasting the near-term future of housing prices here in the UK and for 2019. In the dangerous game of divining the UK housing market for the upcoming year, I will break down all the key factors that could have a significant impact and explain the trends that seem to be arising and their significance.
So, firstly, some definitions and ground rules:
House prices – This will be taken to mean the median price change of residential property, in aggregate, not weighted by value. So, if a £1m house goes down 10% and £100k house goes up 10%, the median change is 0%, not -9%.
The UK– Meaning all of what is currently considered the United Kingdom, regardless of what happens with any EU issues around Northern Ireland and Scotland.
2019– The timespan beginning 1 January 2019 and ending 31 December 2019.
What do we know about the inputs that will be affecting our forecast and defining our trends?
Well, from a macro perspective, I will analyse the external influences on the UK housing market. That is to say, the major factors affecting strategy and decision-making within the market, which are beyond our control. The specific factors I will focus on for the purposes of this series are: global economic outlook; UK economic outlook; inflation; interest rates; auto-correlation of activity; and, supply and demand.
From a micro perspective, I will consider individual expectations of the housing market, as well as trends such as changes in fashion and personal wealth.
In the first instance, I will take the widest perspective of macro factors: the global environment affecting our forecast.
Let us begin!
Global Economic Outlook
Beyond the political mire of Brexit, the changing financial and economic characteristics of the rest of the world sets an interesting new landscape. While the majority of the EU has been lagging far behind, over the past few years the UK has been returning to a sense of economic well-being. Meanwhile, the US has been steaming ahead. Markets are up; interest rates are up; growth is up; incomes are up. The US is now in the second longest ‘bull run’ in history.
For a variety of reasons, however, US yield curves briefly inverted in recent weeks. This is a tell-tale sign that economic moods are shifting and that the party may well be over in a year or two. As the world’s largest economy, when the US sneezes, the world catches a cold. While it is slightly outside the scope of this one-year forecast, it is worth keeping any eye on what happens across the Atlantic throughout 2019.
In China, the world’s second largest economy, growth is slowing. Political power has become ever-more centralised in Xi Jinping (and thus increasing ‘decision risk’). In addition to this, the enormous debt taken on by the corporate sector means that the total debt in China is now equivalent to 300% of GDP. These two factors combined increase China’s economic risk weighting considerably.
The GBP’s recent currency weakness (thanks, Brexit uncertainty) potentially creates a good opportunity for overseas buyers, providing that they believe there is more economic upside in the UK in the not-too-distant future.