Chief economist delivers his outlook for the UK housing market

As we draw close to the end of the year, predictions and expectations for the UK housing market in 2024 are dominating the headlines.

Mortgage Introducer sought the views of a chief economist to discuss his outlook on interest rates, the wider housing market and some expected challenges for the mortgage market in 2024 on a global scale.

What is the outlook of interest rates in 2024? 

Alberto Matellán (pictured), chief economist at MAPFRE Inversión, said there is an ongoing debate among economists over what will happen to rates next year.

The widest view, he said, is that interest rates will stay where they are at least until the second half of 2024, and then start to come down. This, Matellán added, is valid for most major western central banks, like the US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE).

“However, that is too simple; if it proves true that the combination of inflation and growth or employment drives central banks’ rates lower in the second half of 2024, markets will anticipate it, and yield curves would come down earlier,” he said.

Unfortunately, Matellán said, that does not necessarily spell good news for the consumer or bank borrowers, whose financial costs tend to move closer to money market rates.

“This is where changes to money market rates either tend to lag changes to yield curves or are set higher as, say, banks look to maintain lending margins,” he explained.

Changes in central bank rates, Matellán said, normally reach markets before being passed on to commercial bank clients.

“As you know, a change in a central bank rate means a change in liquidity conditions; how exactly, that depends on how each central bank operates, but for all of them it means that the availability of money or the need for collateral changes almost immediately,” Matellán said.

Matellán said clients’ conditions are subject to a much longer channel of commercial/strategic decisions, which might take from a few months to years to come to fruition.

In general, however, Matellán added that economic growth as measured by GDP is proving more resilient than expected, on both sides of the Atlantic.

“In the United States, we have witnessed more than six months of consistent upwards revisions to GDP forecasts, based on positive surprises in current data,” he said. In Europe, Matellán said, the situation is similar, although to a lesser extent – however, he added that this does not mean economic growth is solid.

“It is not, actually it is weak, and it seems it will be even weaker, but it turns out better than most analysts expected,” he said.

Inflation, on the other hand, Matellán said, is moderating, but more slowly than expected, in particular core CPIs; this combination, he added, leaves no room for short term dovishness.

The expectation for rate cuts in 2024, he said, is based on the forecast of much lower inflation and a serious hit to growth.

“Although I agree with that view, we must witness a very drastic change in conditions to see rate cuts; that is why I am very prudent about reducing rates next year,” Matellán added.

What is the outlook of the housing market for next year?

Housing markets are very location dependant, Matellán said, even within the same country or region.

“We are already seeing the hit of higher interest rates across Europe and in the UK, but that means, in general, less transactions,” he said. “Meanwhile, price drops are somewhat limited in prime markets, as buyers with lower financial needs might consider real estate an alternative asset in times of uncertainty and high inflation.”

Matellán added that price drops have already begun to slow in cities like London, Paris and Madrid; if these conditions hold, he believes next year should be a transition period, in which most of the hit would have been already felt.

“That means that we could see a mild recovery by the end of 2024, but until then the market would be quite muted, although that is completely dependent on the macroeconomic conditions,” he said.

What are some of the key challenges the housing market will face next year?

Matellán said there are several risks to the above scenario, specifically the idea that interest rates could move higher.

An increase in defaults for both companies and consumers could be seen, which Matellán said may indirectly affect markets, such as low-medium office and commercial real estate.

“Finally, growth is also a risk; as we said above, it is expected to slow down very significantly. If the hit is big enough, that would impact both households’ and companies’ incomes,” he said.

“These levels of interest rates are very well aligned with current macroeconomic conditions, even if inflation goes back and stays near 2% levels, interest rates should not fall below that, as that might trigger some misguided investments,” he said.

In this sense, Matellán added that the greatest challenge might not be to weather a tough year, but to try to improve how solid balance sheets are in order to successfully face any future scenario.

What are you expecting from interest rates and the wider housing market in 2024? Let us know in the comment section below.