Must read: FTSE 100, China rate cut, UK house prices, Crest Nicholson

GLOBAL MARKETS

European markets have opened cautiously higher. After hitting near five-month lows on Friday, the FTSE 100 is staging modest gains with BP (LSE:BP.) towards the top of the index as underlying oil prices rise amid tightening supply which is offsetting sluggish demand. Housebuilders are at the bottom of the blue-chip index after Crest Nicholson sharply downgraded its profit outlook for the year. In Germany, producer prices fell by 6% year-on-year in July, the first drop since November 2020.

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China surprised the markets by opting for more modest-than-expected rate cut. It lowered its one-year benchmark lending rate by 10-basis points and kept its five-year rate unchanged, despite forecasts for a 15-basis point reduction in the two. Nonetheless its one-year loan prime rate is now at a record low of 3.45%. Chinese stocks slumped to a nine-month trough, and the yuan continues to suffer. The US 10-year treasury yield hit the widest level against its Chinese equivalent since 2007.

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All eyes will be on the Jackson Hole central bank symposium in Wyoming later this week for clues into the future path for interest rates.

UK RIGHTMOVE HOUSE PRICES 

Rightmove’s asking prices fell by 1.9% in August to £364,895, the biggest drop for this month since 2018. However, asking prices are still 19% higher than August 2019.

Home sales fell by 15% versus 2019 before the onset of the pandemic while first-time buyer sales proved to be more resilient, dropping by a more moderate 10%. The number of properties listed for sale on Rightmove slumped by 10% versus August 2019.

The housing market boomed during Covid thanks to the stamp duty holiday and as households sought out bigger properties with gardens and space for at-home offices. However, today’s more subdued figures from Rightmove echo recent data from Nationwide and Halifax to suggest that the housing market is shrinking.

The Bank of England’s aggressive stream of rate hikes that have made it considerably more expensive to borrow are taking the heat out of the market, forcing buyers to respond to weaker demand by lowering their asking prices. Many would-be sellers are choosing not to list their properties at all, given the increased difficulty in achieving their desired selling prices. Stagnation in the housing market is prompting more individuals and families to turn to the letting market instead, pushing rents sharply higher. The increased cost of renting is shielding the first-time buyer market from deeper pain where sales are softening but less aggressively.

Expensive mortgages, wider cost-of-living pressures, and a general backdrop of macroeconomic unease with sluggish growth and increasing slack in the labour market are taking their toll on house prices, which are expected to feel further pain as the year progresses. Asking prices are having to recalibrate to reflect the fact that home buyers cannot afford to borrow as much as a few years ago. However, stemming an even steeper slide in the market is the chronic shortage of housing supply in the UK.

CREST NICHOLSON

Crest Nicholson (LSE:CRST) cut its profit outlook. The housebuilder now expects full-year adjusted profit before tax to come in at around £50 million, down almost a third from its previous guidance for £73.7 million. Crest Nicholson said transaction levels across the industry have weakened further, particularly in recent weeks. Nonetheless it said the Board remains committed to its FY23 dividend.

The housebuilder has struggled with worsening trading conditions over the summer amid the backdrop of high inflation and rising interest rates. As a result, Crest Nicholson expects to reduce future land activity significantly. With mortgage borrowing becoming increasingly expensive, the housing market is feeling the squeeze, weighing on the housebuilder sector, particularly given that strong wage growth and core inflation means that interest rates are expected to remain elevated for some time and these issues are here to stay.

Shares in Crest Nicholson have had a tough time lately, underperforming the UK market, weighed down by the prospect of ongoing inflation, higher interest rates and subdued borrowing. And the stock is trading sharply lower in today’s trade, shedding over 12%, pricing in the hefty profit downgrade. Its update is weighing on other stocks in the sector like Taylor Wimpey (LSE:TW.), Persimmon (LSE:PSN)and Barratt Developments (LSE:BDEV), which have sunk to the bottom of the FTSE 100. Real estate is the worst-performing sector across Europe today.