Stagflation threat keeps global house price growth in check

Global stock markets touched all-time highs yesterday after a soft(ish) US inflation print calmed fears of a prolonged bout of tariff-induced stagflation – a mix of persistent inflation, stagnant growth, and rising unemployment.

Inflation held steady at 2.7% in July. Economists had been expecting a rise of 2.8%. Core inflation, which strips out more volatile items, matched expectations. Services inflation picked up, but a rise in goods prices was relatively subdued, calming fears that tariffs will leave the Federal Reserve's rate-cutting cycle on pause indefinitely. A cut in September is now almost fully priced in.

As many have now pointed out, it's not clear yet whether optimism is warranted. Consensus suggests that tariffs will fuel inflation once inventories are depleted. That, combined with rising prices in the services sector, could be a toxic mix.

Negative territory

The trajectory of US inflation – and, crucially, trade policy – will ripple through global housing markets, though the impact will vary by region. Global house price growth has strengthened as we've moved into 2025 – the weighted average annual growth rate of 2.3% is the strongest since Q2 2024, Knight Frank's Global House Price Index reveals this morning.

This is below the long-run trend rate of 5.1%, and further growth will likely depend on additional policy easing through the rest of 2025.

Turkey leads our index again, posting the strongest nominal annual growth at 32.2%, though high inflation means its real annual growth remains negative at -4.2%. European markets dominate the top of the table: eight markets saw nominal growth above 10%, seven of which are in Europe, led by North Macedonia at 22.6%. At the other end, Mainland China and Hong Kong SAR recorded the largest annual declines, down 7.5% and 6.5% respectively.

Although nominal growth is relatively robust, global real house-price growth remains in negative territory, with average annual real growth of -0.4% during the quarter. Elevated inflation – particularly in Europe and North America – continues to erode real purchasing power, and borrowing costs, even after cuts, remain higher than pre-pandemic lows.

Marked by divisions

The Federal Reserve isn't the only central bank hoping to see off the threat of stagflation. Official UK jobs figures published this week showed a weakening jobs market, with payrolls falling for a sixth month and vacancies continuing to drop, but with pay growth running well above levels compatible with inflation remaining at target.

Overall average weekly earnings, excluding bonuses, climbed 5% on an annual basis during the three months to June. Anything above 3% is considered incompatible with the Bank of England's 2% inflation target. The data continues to muddy the water for the BoE – last week's decision to cut the base rate was marked by divisions in the Monetary Policy Committee over the path of interest rates moving forward.

At a sector level, the figures chime with the PMI released last week showing steep drops in construction. Construction employment fell 2.9% month on month and 4.9% on an annual basis. Employment is now 14% lower than the pre-pandemic average, and vacancies have come off by a fifth.

Demand-side constraints

This trend will make it virtually impossible to raise housebuilding to levels the government would like, and there will inevitably be a knock-on impact on costs if we do see a ramp-up in the future. Knight Frank's Residential Development Land Index, out this week, gives more details on this key issue and many others. Four-in-ten housebuilders report struggling to meet output targets in the past twelve months due to labour and skills shortages. Almost half cited bricklayers as the trade most impacted, followed by carpenters and plasterers.

While the government has taken strides on planning, it's just one of several challenges that developers are facing. UK residential land values dropped in the second quarter as housebuilders continued to struggle with planning delays, poor sentiment among buyers, and a lack of registered providers available to take on Section 106 affordable homes.

The results suggest that, even if ministers were to grease the wheels of the planning system even further, the demand-side picture will continue to drag on output. Bellway became the latest housebuilder to call for some kind of demand-side stimulus in a trading update yesterday:

"In the years ahead, our industry should benefit from the Government's recent planning reforms, although we continue to experience delays to planning decisions as local authorities are taking time to adopt new local plans and the updated National Planning Policy Framework. To complement these supply-side measures and to meet its ambitious housing targets, the Government also needs to address the demand-side constraints facing first-time buyers."

Gateway 2

Those developing higher-density schemes in key employment hubs face unique challenges – particularly when it comes to Gateway 2, a checkpoint in the Building Safety Act for buildings higher than 18 metres, or seven storeys.

While our Q1 index referenced Gateway 2 as a barrier in qualitative terms, Q2 provides concrete scale: our respondents have in excess of 6,600 homes in the Gateway 2 process. The unpredictability of the process, particularly repeated delays, is meaningfully reducing demand for land and appetite to begin new projects.

Of those respondents impacted, nearly half say the process is adding more than 12 months to project timelines. A third expect to wait more than six months for checks to complete. Respondents also highlighted that late-stage viability reviews continue to slow urban schemes by adding uncertainty to project finances and timelines. See the report for more.

In other news...

From our team - Tom Bill on the differing fortunes of prime central and prime outer London, and why international tenant demand is defying the economic gloom. Claire Williams on the impact of acquisitive Chinese firms in the UK logistics market.

Elsewhere - Swiss likely to end property tax, hit chalets with a new levy (Bloomberg).