Housing Market Faces Tepid Spring

Soft US housing data, sticky UK inflation, and Japan’s bond market jitters dominate this week’s outlook.

• US: Housing Struggles
• UK: Tax Hikes Look Likely in the Autumn Budget
• Japan: More Risks on the Horizon
• Australia: Finally, a Dovish Pivot
  
• Spotlight on Next Week

Weekly Highlights

US: Housing Struggles

It has been clear for a while that the 2025 spring home buying season was going to be rather uninspiring. Additional data this week confirmed this assessment. Admittedly, new home sales surprised positively in April with sales at 743k annualized, but this was largely offset by a big downward revision to the March data, such that January–April sales are still marginally (0.8%) lower than a year ago.

Lower demand is meeting increased supply, with the overall supply of new homes hovering around 8.5 months’ worth of sales—an elevated level from a historical perspective. Moreover, within that overall supply, the number of already completed homes available for sale has continued to rise, even as builders have adopted a more cautious approach to inventory management. The result has been mild downward pressure on prices, which could persist amid elevated mortgage rates. But high construction costs provide a floor here.

The news is not any better in the existing home market either. Existing home sales came in at 4.0 million seasonally adjusted annualized (saar), down 2.0% y/y. The supply of existing homes reached 4.4 months’ worth of sales, the highest level since May 2020 and, prior to that, September 2016.

Unsurprisingly, given the supply-demand dynamics, the pace of home price appreciation continues to moderate. The median price of an existing home rose just 1.8% y/y in April.

These dynamics speak to some offsetting inflation developments in parts of the economy that are not directly affected by tariffs and are an important reason why we see a more benign inflation impact from tariffs than the consensus.

UK: Tax Hikes Look Likely in the Autumn Budget

Further tax hikes in the Autumn Budget still look highly likely. The positive impact from the EU-UK trade deal announced on Monday is limited and likely to be offset by other factors working in the opposite direction.

The trade outlook appears to be improving for the UK. On Monday, the government announced the EU-UK reset deal. After the US and India, the EU is the third partner with which the UK has secured a trade deal this month. It is also the most important deal for the UK, given the OBR’s estimate of a 4% hit to UK productivity from Brexit. At this early stage, the details are still limited, but we know that the UK has secured a veterinary agreement with the EU as a concession for allowing European fishing boats access to UK waters for another 12 years. Both sides have also agreed on deeper defense cooperation. The government estimates that the deal will add £9bn to GDP by 2040, around 0.2% of GDP at that time. Combined with the deals with the US and India, it’s estimated to boost GDP by 0.3% over several years. While this is just a fraction of the 4% hit to GDP, the deals—especially with the EU—offer room for further expansion in the future.

On the other hand, CPI inflation surprised to the upside in April, rising to 3.5% from 2.6% in March. As expected, energy added almost 0.7 percentage points to headline CPI following a 6.4% rise in Ofgem's price cap on April 1. Other indexed contracts and regulated prices rose more than expected. Importantly for the BoE, services inflation increased sharply from 4.7% to 5.4%. Admittedly, half of the increase was due to higher road tax, which is unlikely to be a major concern for the BoE. The rest was due to a 28% surge in airfares, with April's price collection dates coinciding with the Easter holidays—unlike in 2024. These factors should fade over the coming months. Apart from those categories, others—including restaurants, medical care services, and rents—experienced further disinflation. So overall, core CPI services inflation appears relatively stable. Therefore, while the CPI hike will add pressure to the BoE, we expect the bank’s quarterly cuts to continue this year and into next year.

At the same time, stronger-than-expected retail gains and a slight pickup in household consumption seem to offer modest support to Q2 growth. But President Trump’s threat of a 50% tariff on EU imports from June 1 introduces new downside risks to growth. The gains the UK may see from lower 10% tariffs and the trade deal with the US could be offset by a large negative growth shock to the EU, the UK’s biggest trading partner.

Despite the boost from higher employers’ National Insurance Contributions (NICs) and stronger-than-expected Q1 growth, public finances appear to be worsening. The government borrowed £20.2bn in April (on the PSNB excluding banks measure), up from £18.5bn last April and higher than the consensus forecast of £17.9bn. With the rise in borrowing costs since March, the PM’s partial U-turn on the cut to winter fuel payments, and low economic growth, the UK is facing reduced fiscal headroom and a greater fiscal burden. As markets have become more sensitive to borrowing, tax hikes in the Autumn Budget now seem very likely.

Japan: More Risks on the Horizon

National inflation was once again elevated this week, as core CPI (excluding fresh food) came in at 3.5% y/y, topping 3% for a fifth month and reaching the highest level since January 2003. Headline CPI was 3.6% y/y, while a globally comparable core metric (excluding fresh food and energy) was also firm at 3.5% y/y.

Food was once again the key driver, particularly rice and alcoholic beverages. However, a metric tracking private sector services—critical for the BoJ—also accelerated three-tenths to 2.7%. These data suggest that price pressures are mounting again, despite temporary relief from measures like free high school tuition. We have been highlighting for some time that Japan’s inflation shows the largest deviation from its long-run average among advanced economies.

However, the focus this week has been on the bond market for other reasons. Japan’s super-long yields have risen sharply (to all-time highs in some cases) on the back of several factors, especially after the 20-year JGB auction attracted shockingly low demand, resulting in the worst auction since 2012. This also coincided with the US sovereign downgrade by Moody’s. At the same time, slow progress on trade negotiations with the US also weighed on sentiment.

All of this bodes poorly for the BoJ, which may not only refrain from hiking (despite inflation) but may also be less likely to intervene in the bond market. Even though Japan’s Upper House elections are shaping up around a cut in consumption tax, we hope fiscal prudence is maintained. This might provide some reassurance to the bond market. However, it would also mean weaker real consumption, eventually posing more downside risk to the economy.

Australia: Finally, a Dovish Pivot

The Reserve Bank of Australia (RBA) more than delivered on expectations of a rate cut this week by coupling it with their much-awaited dovish pivot. This is welcome. The cash rate was cut by 25 bps to 3.85%, and there is now broader agreement on the terminal rate reaching our forecast of 3.10% this year. The statement noted that “The Board will be attentive to data and the evolving assessment of risks to guide its decisions,” instead of “the Board will rely…” from April—a subtle but noticeable pivot. The bond market welcomed this shift as yields fell.

There is also consensus that inflation has been reined in across Australia, something we forecasted last year. We specifically wrote: We see inflation easing into the target range next year (2.4%), even if labor market strength persists. This is due to base effects and an improving supply situation amid markedly eased demand. This is the most crucial reason for reducing rates.

With this, the focus now turns squarely to the release of Q1 GDP data on June 4, which may highlight another below-par consumption number—something hinted at by stalled retail volumes (data released on May 2). Whether this data influenced the RBA is unclear, but Governor Bullock mentioned that the Board considered a 50 bp cut this week, even if that was not “the strongest argument in the room.” Secondly, the outcome further validates our assessment that the strong labor market is perhaps less important than the state of consumption in the economy. This was also mentioned by the Governor during her press conference.

We still see a terminal rate of 3.10% by year-end and retain our previous timing forecast. However, the next cut might be frontloaded to July (from August) if GDP data disappoints.

Spotlight on Next Week

1. The US trade deficit should moderate after the recent spike.
2. Japanese retail sales may improve.