Solid economic growth belies a coming slowdown

Transcription

1 Economics Solid economic growth belies a coming slowdown UK Property Market Chart Book August 16 Sponsored by:

2 Key Property Data Release Dates Frequency Body Period covering Release date Q IPD/MSCI UK Commercial Property Price Q 1-Aug-16 M Markit Construction PMI July -Aug-16 M BIS Building Material and Components July 3-Aug-16 Q/M BoE Inflation Report and Interest Rate Decision Q/July 4-Aug-16 M BoE Quoted Rates July -Aug-16 M Halifax House Price Index July 8-Aug-16 M CML Monthly Lending Trends July 1-Aug-16 M RICS Residential Market Survey July 11-Aug-16 Contents Economic comment... 3 Financial market indicators... 4 UK Economy... Global Economy...6 Construction sector...7 Housing market...8 Commercial property sector...9 Additional Resources...1 M IPD/MSCI UK Commercial Property Price July 1-Aug-16 Q CML Arrears and Repossessions Q 1-Aug-16 Q ONS Construction Output Q 1-Aug-16 M ONS House Price Index June 16-Aug-16 M ONS Consumer Price Index July 16-Aug-16 M ONS Labour Market Statistics Aug 17-Aug-16 M BBA High Street Banking July 4-Aug-16 M HMRC Residential Transactions June 3-Aug-16 M ONS Index of Private Housing Rental Prices July 4-Aug-16 M Nationwide House Prices July 8-Aug-16 M BoE Mortgage Lending Statistics July 3-Aug-16 RICS Economics 16 August 16

3 Output data strong but slowdown expected The UK economy grew by.6% in the second quarter, following.4% in Q1. The industrial sector bounced back following two consecutive quarters of contraction with output rising by.1% in Q. Construction output contracted for the second quarter running while the services sector grew at its most modest rate in a year. However, with the usually reliable Markit PMI index hitting a seven year low in July and with most other major surveys pointing to a reduction in business sentiment, we expect output growth to moderate in the coming quarters. Recent labour market data has also remained quite firm with the economy adding 176k jobs in the three months to May and the unemployment rate falling below % for the first time since. Official statistics suggests that weak productivity performance continues and survey evidence (see chart of the month) points to no improvement in sight. With consumer confidence faltering due to the greater economic uncertainty and recent CBI survey data indicative of a slowdown in retail spending in the wake of the Brexit result, output growth is likely to moderate in the coming quarters. The Bank of England looks likely to take some stimulative measures at its meeting in August but with a range of options on the table, including rate cuts, an extension of it s quantitative program or the reintroduction of the funding for lending scheme, it is yet unclear what policy stance they will take. We expect the Bank to be quite cautious in it s actions on rates given the reluctance it has expressed in the past on taking Bank Rate into negative territory, and therefore a basis point (.%) rate cut is the most we foresee. However, some additional measure is very likely and we are almost guaranteed a clear message on what form additional stimulative policies will take in future. The restructuring of the government under the newly appointed Prime Minister May could lead to some modest changes to the fiscal stance in the coming months, and the new Chancellor insists he is willing to take steps to shore up growth should economic circumstances deteriorate. Some modest easing or a pause in the fiscal consolidation looks likely at the time of the Autumn Statement given that hard economic data are likely to reflect the weakening in survey indicators that we have seen in the wake of the Brexit vote. Chart of the month Index Labour Productivity EC Services/Manufacturing output expecectations minus employment expectations (Adv. 3 quarters - LHS) Output per hour* (RHS) *latest reading is imputed based on data to May Source: European Commission, ONS In the euro area growth slowed to.3% in the second quarter following.6% in Q1. Survey evidence had indicated that a moderation was likely following the upside surprise the previous quarter but as yet, there is very little evidence to gauge what impact the UK s vote to leave the EU may have on the single currency block. In the US, payrolls grew at their fastest rate in 9 months in June but this followed an extremely weak reading the previous month. Looking through the volatility, momentum in the labour market appears to be drifting lower, with demand from commercial property tenants growing at its slowest pace in six years in Q, according to the latest RICS US Commercial Property Market Monitor. However, some moderation in employment growth was always likely given the strong growth over the last three years, and at its meeting in July, the Fed left open the possibility of a rate hike some time this year. However, following the much weaker than expected Q GDP growth reading of 1.% (annualised), there is now much less chance of any rate rise in 16. In the UK, the Q RICS Construction Market Survey showed surveyors workloads rising at the slowest pace in three years with a net balance of 17% of contributors seeing activity increase. Anecdotal evidence suggests that projects were being delayed in the run-up to the referendum, and the increased uncertainty is likely to weigh on activity further. Respondents have significantly reduced their expectations in light of the vote to leave, and now foresee workloads rising by 1% over the course of the next 1 months, down from.8% in Q1. Workloads in the private commercial and industrial segments saw the sharpest moderation in activity during Q and we expect output in these sectors to contract in the coming quarters. In the residential market, new buyer enquiries declined at the fastest rate since the financial crisis, with activity falling across all parts of the UK in June. Near term price expectations also turned negative, and prices are expected to stagnate at the 1 month horizon with contributors, on average, expecting a.3% fall. With regards to commercial property, UK REIT prices have bounced back somewhat in recent weeks following the initial shock of the referendum vote to leave the EU. The RICS Commercial Property Market Survey shows a substantial fall in investor demand and expectations for capital growth in light of the increased uncertainty. On average, respondents now expect capital values to decline by just over 1% over the coming 1 months. Rent expectations also turned negative for the first time since the start of 13 but RICS indicators suggest that yields are likely to trend up over the coming quarters, reflecting the increased risk of holding UK assets in light of the greater economic uncertainty. 3 RICS Economics 16 August 16

4 Financial Market: Volatility eases and equity prices drift up Equity prices in all major markets have drifted up as the initial shock following the UK s vote to leave the EU wore off. Risk appetite has improved and is back to the level that prevailed in the months leading up to the EU referendum. 1 1 = Jan 14 Global Equity Indices 4 Index Equity Volatility Indices FTSE 1 S&P Euro Stoxx Hang Seng 9 FTSE Nikkei 8 Eurostoxx S&P 8 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Source: Macrobond 1 1 Jan-1 Apr-1 Jul-1 Oct-1 Jan-16 Apr-16 Jul-16 Source: Macrobond UK government bond yields continue to drift lower with the and 1 year benchmarks reaching record lows. 6 % UK Nominal Government Bond Yields UK interest rate expectations have shifted lower since the EU referendum with policymakers indicating their intention to provide stimulus in the coming months. Meanwhile, the Federal Reserve has left open the possibility of a rate hike in 16 and market expectations of a rise have increased Year US and UK Interest Rate Expectations year 1 1 year Source: Bank of England.4. UK US* Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 *based on instantaneouse forward rates Source: BoE, Fed 4 RICS Economics 16 August 16

5 UK Economy: Firm growth but surveys point to slowdown UK economic output rose by.6% but survey evidence points to a weakening in output growth over the rest of the year. Recent labour market readings remain firm, and the unemployment rate to it s precrisis level. Index Orders Index and Output Growth (four quarter sum) 4 3 month change ('s) UK Employment/Unemployment % Survey Orders Index* (LHS) -3 UK GDP (RHS) *weighted average of BCC,PMI & CBI sector orders indices Source: ONS, Markit, BCC, CBI -1 - Employment Growth (LHS) ILO Unemployment Rate (RHS) Source: ONS However, there still remains significant hidden slack in the labour market with many more people still underemployed (i.e. working temporary/part-time jobs because they cannot find permanent/full-time work) relative to the pre-crisis period. The depreciation of sterling will boost exports but it tends to take a significant time before the full benefit of more competitive export prices are felt % Labour Market Slack Unemployment plus underemployment rate (LHS) Unemployment rate (RHS) Sterling Exhange Rate and UK Exports Source: ONS 1 UK broad exchange rate index (Adv. years - LHS) Total UK exports (RHS) Source: Bank of England, CPB RICS Economics 16 August 16

6 Global Economy: Weak US growth makes 16 rate rise less likely Occupier demand growth in the commercial tenancy market points to continued solid job growth in Europe s biggest economies in the quarters to come. Growth in China continues to slow, gradually, and investor concerns about a sharp correction have eased. 4 Occupier Sentiment and Job Growth in Large Euro Area Economies China GDP and Composite PMI Index ( = no growth) RICS Germany/France/Spain/Italy* Occupier Demand (Adv. 6 months - LHS) Germany/France/Spain/Italy Employees (RHS) China GDP (LHS) Markit China Composite PMI (RHS) *GDP weighted average of Italy, Germany, Spain and France Source: RICS, Eurostat Jul-13 Jan-14 Jul-14 Jan-1 Jul-1 Jan-16 Source: NBS, Markit US jobs growth soared in June following a weak reading in May. However, the underlying trend is downward as indicated by the weakening in demand for commercial property space for rent. As the impact from the lower oil price falls out of headline inflation, US price pressures should drift up. However, with Q growth coming in much lower than expected, any rate hike in 16 now looks much less likely. 8 7 RICS US Occupier Demand and Non-farm Payrolls 3m/3m change 1 US Earnings, Employment, Exchange Rate and Inflation RICS weighted* occupier demand (LHS) -1 1 US non-farm payrolls (RHS) -1 - US employment times wages divided by dollar exchange rate (Adv. 3 months - LHS) US CPI (RHS) Jan-1 Oct-1 Jul-11 Apr-1 Jan-13 Oct-13 Jul-14 Apr-1 Jan-16 Source: RICS, BLS - Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-1 Jan-13 Jan-14 Jan-1 Jan-16 Source: BLS, OECD -3 6 RICS Economics 16 August 16

7 Housing Market: Buyer demand falls across all areas Buyer demand and transactions fell across most parts of the UK in the run up to the referendum. Sales levels are likely to soften as buyers consider their options in the wake of the referendum outcome. 3 RICS Buyer Demand and Sales 8 Housing Transactions and New Buyer Enquiries % change 3m/3m RICS New Buyer Enquiries RICS Agreed Sales LONDON SE EA WALES SW Y&H NORTH NW W MID E MID SCOT N. IRE Source: RICS RICS New Buyer Enquiries - (Adv. 3 months - LHS) -6 HMRC Residential Transactions 3m/3m - (RHS) Source:RICS, HMRC The near term outlook for prices has turned negative across all parts of the UK. At the 1 month horizon, prices are expected to be higher across most areas, with London and East Anglia the only exceptions. The RICS price balance points to a moderation in the rate of price growth throughout the rest of RICS Price Expectations RICS 3 month price expectations RICS 1 month price expectations LONDON SE EA WALES SW Y&H NORTH NW W MID E MID SCOT N. IRE Source: RICS RICS New RICS Buyer Price Enquiries Balance and Plus Land New Registry I nstructions House and Price Land Index Registry Sales Net balance % Net balance % RICS Price Balance - Adv. 6 months (LHS) 17 1 Land registry England and Wales HPI (RHS) NBE Plus NI (3m av. Adv. 6 months) -4 Land Registry Sales smoothed (RHS) Source: RICS, Land Registry 7 RICS Economics 16 August 16

8 Commercial Property: Yields likely to trend up Surveyors expect capital values to fall slightly over the next 1 months. Yields are likely to drift upwards over the course of the next 6 months, reflecting the increased risk of holding these assets following the vote to leave the EU. 4 3 RICS Members' Twelve Month Capital Value Expectations (expected) Q1 16 Q 16 3 RICS Rent and Capital Value Expectations and CoStar All Property Yield Annual change, % RICS rent minus capital value expectations (Adv. 6 months - LHS).1% 1.6% 1 CoStar all property yield (RHS) 1.1% 1.6%.1% % -.9% % -3 Prime Office Secondary Office Prime Industrial Secondary Industrial Prime Retail Secondary Retail Average Source: RICS % Source: RICS, CoStar Greater economic uncertainty has led to a reduction in investment intentions in the services sector. This has led to a slowdon in office investment and development projects in the pipeline. Overseas investment into UK property has been falling as a result of the uncertainty and better growth prospects in other markets. While international investment may continue to trend down there is unlikely to be a collapse in interest CBI Services Sector Uncertainty and Office Investment Change in % responding 'yes' (inverted axis) CBI services sector - uncertainty limiting investment (LHS) (four quarter sum) ONS office construction orders and IVBL office 3 investment (RHS) Source: ONS, IVBL, CBI Economic Climate and Overseas Commercial Property Investment 6 % change in ratio (four quarter sum) IFO Ratio of UK to world climate index (Adv. 6 months - LHS) IVBL overseas investment (RHS) Source: IFO, IVBL 8 RICS Economics 16 August 16

9 Construction Sector: Brexit result weighs on activity The Q RICS Construction Market Survey shows a further slowdown in growth and respondents have significantly reduced their expectations over the coming 1 months. Surveyors workloads moderated most substantially in the private industrial and commercial sectors with anecdotal evidence suggesting that some projects were being delayed in the wake of the uncertainty following the vote to leave the EU. RICS Workload and Workload Expectations RICS Workloads and ONS Construction Output Net balance % RICS Workloads (LHS) - -4 RICS Workload Expectations (RHS) Source: RICS *current quarter minus average of previous four. weighted average of commercial and industrial workloads RICS adjusted commercial and industrial workloads* (LHS) ONS private industrial and commercial construction (RHS) Source: RICS, ONS -1 - Growth in the private housing market has also been slowing over recent quarters but we expect output to hold up compared to other parts of private sector construction. 4 Adjusted net balance % RICS Workloads and Private Housing Construction Output 3 1 As activity has slowed, skills shortages have eased slightly. However, with 44% of contributors reporting difficulties sourcing labour across all of the main trades and professions, they remain high by historical standards and will continue to impede construction activity Construction Skills Shortages % reporting 'yes' 's RICS Skills Shortages Average (LHS) Construction Unfilled Vacancies (RHS) RICS Adjusted* Housing Workloads (Adv. 1 year - LHS) Private Housing Output (RHS) *Current workloads minus average of previous 4 quarters Source: RICS, ONS 9 RICS Economics 16 August 16

10 Market Surveys & Reports Why the RICS surveys? The RICS poll - considered one of the most reliable guides to movements in house prices. Financial Times The RICS survey - the best short-term lead indicator of house prices and activity in our view. Goldman Sachs The RICS Survey has been a good leading indicator for the direction of and inflection points in the IPD index, and therefore the UK commercial property market overall. Morgan Stanley The RICS Commercial Property Survey is an excellent predictor of future IPD total returns. North Row Capital Download RICS Economic market surveys and reports at www. UK Residential Market Survey (monthly) UK Construction Market Survey (quarterly) UK Commercial Market Survey (quarterly) UK Rural Market Survey (semi-annual) Global Commercial Market Monitor (quarterly) RICS / Ci Portuguese Housing Market Survey (monthly) Hong Kong Residential Market Survey (monthly) Canada Construction Market Survey (quarterly) The Economics Team Simon Rubinsohn, Chief Economist srubinsohn@rics.org +44 () Jeffrey Matsu, Senior Economist jmatsu@rics.org +44 () Michael Hanley, Economist mhanley@rics.org, +44 () Tarrant Parsons, Economist tparsons@rics.org, + 44 () Janet Guilfoyle, Surveys Administrator jguilfoyle@rics.org, +44 () Advertising & sponsorship opportunities If your company or organisation is interested in being associated with this publication and you would like to discuss potential opportunities, please contact us at economics@rics.org 1 RICS Economics 16 August 16

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