The Markets

Alongside the irises, daffodils, tulips, and other perennials that were popping up last week, there was a lot of talk about the housing market and what its performance means about the state of the economy. Perceptions varied.

The UK housing market has shown improvement in the last year; however, there are now signs that activity in the housing market may be “starting to moderate,” said the UK’s largest building society, the Nationwide.

Prices in May rose by 0.7%, compared with a 1.2% rise in April. However, the annual rise in house prices edged up from 10.9% to 11.1%, the fastest increase in seven years. Nationwide said the slowdown could partly be the result of new mortgage lending rules, which officially started in April. It added that the government’s Help to Buy mortgage guarantee scheme seemed to have played little part in house price growth. The building society’s comments came as the European Commission called on the UK to raise taxes on higher-value properties, build more houses and adjust the Help to Buy scheme. The average UK property price is now £186,512, the building society said.

The number of mortgage approvals in April is down 17% from January. It is too early to say whether nationally this is indicative of a cooling trend in the wider market. The May slowdown could be linked to the introduction of tougher questions in the mortgage application process. The new measures require mortgage lenders to test buyers more strictly about whether they can afford mortgage repayments, including under the scenario of rising interest rates. Despite more stringent mortgage lending rules, demand from first-time buyers was “playing an increasingly important role in the housing market”, Nationwide said. In March, first-time buyers “accounted for 48% of house purchase activity”. 

In the U.S., the minutes of the Federal Open Market Committee, which were finally released last week, showed the Fed recognised recovery in the U.S. housing sector remained slow, but expects economic activity to expand at a moderate pace. 

What are we to make of the conflicting opinions? The housing market is considered to be a leading economic indicator. This means it tends to change direction before the economy changes direction and offers some indication about where the economy may be headed. (It should be noted housing data generally is several months old before it is reported.) Housing is not the only leading indicator. The Conference Board tracks an index of leading economic indicators. For April, its Leading Economic Index® showed improvement for a third consecutive month. It’s a reminder of how important it is to pay attention to the big picture.