Morning Brief – Housing and FX

Charles Porter
Tue 22 Nov 2022

Housing and FX

If asked you might not place the housing market as a key determinant of the value of a currency. Whilst it may not and should not take the top spot in any currency valuation model, vulnerability and instability in a domestic housing market can have a serious impact upon a currency. This is not only because the heath of the property market may constrain or enable central bank action, but it does have merit in its own right. After all, do not forget that the global financial crisis of 2007/8 and the myriad of recessions we witnessed globally following it was, at its core, a housing problem.

There can be a whole host of reasons why housing matters to FX. In the case of the financial crisis, overvaluations in the housing market and a bubble bursting created feedback loops into credit markets resulting in debts turning sour. Sure, the way the debt market had operated for many years prior and how questionable credit was securitised to create false illusions of the probability of repayment were catalysts for that very same overvaluation. However, if prices and confidence in the housing market had remained even to this day, we wouldn’t be talking about the great recession let alone that dated 2007/8.

In a more tangible sense, due to the globalisation of the property market, overseas investors and institutional investors hold a lot of real estate globally. Wobbles in national property markets including a lack of transactions and falling prices can prompt a rapid withdrawal of real estate exposure from those countries. Given such an exit, obvious selling pressure on the domestic currency will ensue as investors exit the country.

We are starting to see vulnerabilities in the housing market already take impact upon currency valuations and demand. Sweden for example for many years has had concerns over its housing market which has sustained a risk premium within the Krona. Those vulnerabilities have been highlighted by the Swedish reserve bank’s tightening policy cycle. During its last policy meeting the Riksbank, Sweden’s central bank, hiked the interest rate by a full 1%. It has maintained its rhetoric of wanting to remain ahead of the ECB’s policy path for the obvious currency implications that may ensue if it failed to do so. However, it had also signalled towards a 50-basis point hike at its next meeting scheduled for Thursday.

Those two objectives will, unfortunately for the Riksbank, be mutually exclusive. Given that the ECB’s most recent meeting saw headline policy rates rise by 75-basis points, expectations for Thursday’s meetings have been raised as we can see expressed in money market pricing. This could leave the Krona with further to fall should the bank fail to deliver on expectations that are priced in. However, to fulfil those out-sized hike expectations will also be to deliver further risks to an already struggling housing market. Concerns surrounding the health of the housing market and property prices have been echoed in the UK and the US notably providing a constraining factor to policy makers. So far, within the US and UK, housing markets have remained sufficiently stable such that it cannot be picked up directly in the Pound or Dollar respectively. However, should more serious routs in these housing markets prevail, domestic currencies may respond more directly and violently.

Discussion and Analysis by Charles Porter

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