RICS Annual Review -The year from a macro-economic perspective
The economist’s view
The year from a macro-economic perspective
The past year has been one to forget. The start of 2011 promised a robust and sustained recovery. That was laid to rest with a number of shocks to the global economy. The tragedy in Japan in March, which severely disrupted supply chains around the world, was followed by political brinksmanship in the US regarding the attempt to put in place a credible medium-term strategy to bring down the national debt. Finally, the eurozone crisis has caused high volatility in the financial market since August. These events have battered confidence in the global recovery. Even emerging markets, responsible for most of the global growth in the past 12 months now seem to be losing momentum. Latin American growth has eased, on the back of Brazilian supply bottlenecks and rising interest rates. Meanwhile, emerging markets in Asia also seem to be softening albeit at a pace consistent with a soft landing with falling global demand and earlier policy tightening being the primary reasons.
Developments in property markets broadly reflected the underlying economic fundamentals. Previous fears of emerging ‘bubbles’ in real estate markets in Asia and Latin America eased on the back of slowing growth in those markets and macro-prudential measures put in place to restrict the flow of credit into the property sector. This was particularly in the case in China where the authorities put in place a series of measures designed to curb speculative activity. On the other hand, in many advanced economies the on-going shortfall in bank finance continued to shape the behaviour of real estate.
The outlook for land, property and construction
Emerging markets will continue to drive construction output over the coming year. Both China and Brazil are aiming to meet ambitious affordable housing targets while India, alongside a focus on a similar programme, will also continue to address the need for a much higher level of infrastructure investment.
According to the latest RICS Global Property Survey, the outlook for the commercial real estate sector is brightest in China, Brazil and Russia, with all three markets expecting to see robust rental and capital value growth. The property sector in many emerging markets will also benefit from the now quite widespread pause in the monetary tightening cycle. Indeed Brazil has started to cut rates on the back of weakening external demand and it could be followed by other countries in due course.
In advanced economies, financing from banks continues to hold back transaction levels, while the deleveraging process in both households and financial institutions’ balance sheets looks likely to continue to dampen demand in the real estate sector. Central banks will in all probability continue to further ease already loose monetary conditions, with the Bank of England’s latest round of quantitative easing unlikely to be the last. In addition, the US Federal Reserve looks set for its own ‘QE3’ in the coming months. The situation in Europe is highly fluid, with a disorderly default in Greece a very real possibility. If such an outcome were to materialise it would have widespread ramifications, straining an already vulnerable financial sector, increasing the borrowing costs of other eurozone countries and further hurting confidence.
However, a more positive outcome is still a possibility if recent policy initiatives addressing the euro zone are implemented promptly and forcefully. This would help restore confidence in financial markets, and start a positive feedback loop that could trigger stronger than anticipated growth in the coming year.
Simon Rubinsohn
RICS Chief Economist
RICS Global
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