Brexit uncertainty features heavily in survey data

Transcription

1 Economics Sponsored by: Brexit uncertainty features heavily in survey data Q 8

2 RICS Economics 8 Q 8

3 Contents Economic outlook... UK Economy...-6 Housing market Commercial property sector...9- Construction sector...- Market surveys and reports...3 RICS Survey Release Dates Frequency Survey Period covering Release date Monthly RICS Residential Market Survey November 3-Dec-8 Monthly RICS Residential Market Survey December -Jan-9 Monthly RICS Residential Market Survey January -Feb-9 Quarterly RICS Construction Market Survey Q 8 3-Jan-9 Quarterly RICS UK Commercial Property Market Survey Q 8 -Jan-9 Quarterly RICS Global Commercial Property Market Survey Q 8 -Jan-9 3 RICS Economics 8 Q 8

4 Economic outlook Austerity is coming to an end was the Chancellor s closing remark in last month s Budget. On the one hand this might be considered true given the OBR s claim that the Autumn 8 Budget represented the largest fiscal loosening since. On the other hand, a combination of Brexit uncertainty, soft productivity growth and a potential moderation in global activity means that the outlook for the economy and the Chancellor s scope for largess in the coming years is far from clear. There is little doubt that a consistent improvement in public finances in the run up to the Budget, partly reflected in the.9 billion reduction in borrowing projections for this fiscal year (than expected in March), allowed the Chancellor to increase public spending. But despite this considerable fiscal loosening, the OBR projects only a modest improvement in GDP. Economic growth is expected to come in at.3% in 8 (relative to.7% in 7) and remain close to.% per year until 3. On a brighter note, as far as households are concerned, inflation has slowed from its five and a half year peak of 3.% at the end of last year to.% in September 8. Forecasts (from the likes of the OBR, IMF, Oxford Economics and The Bank of England) all expect inflation to drop further next year, with most appearing to be reasonably confident that consumer price inflation will reach the Bank s % target by. Meanwhile, the labour market remains solid with the unemployment rate close to % since the beginning of the 8 (the lowest rate since 97) and economic inactivity also falling significantly. The Monetary Policy Committee (MPC) has insisted time and time again that a tighter labour market is likely to push up wages, leading to a rise in domestically generated inflationary pressures, using this argument to lift its key policy rate earlier this year and in November 7. However, there has been little evidence of this so far. Although pay growth did tick up to 3% in August, it remains modest by historical standards and whether this slightly stronger trend in wages will persist is still open to question. A key problem for policymakers is that whilst the UK s employment performance has remained very good, productivity is a real problem. Indeed, output per hour declined sharply after the financial crisis. Since then, average productivity growth has been around.% per annum; significantly lower in comparison to pre-crisis trends. What s more, given the recently sluggish trend in business investment, it s unlikely that productivity growth will rebound in the near term, painting a rather discouraging picture for the economy s longer term growth potential and therefore future tax receipts. It is significant that the OBR and The Bank of England have both assumed a smooth departure from the EU. Although it is hard to know at this stage what the withdrawal agreement (if one is reached) will look like, most analysis suggest that it will leave the economy in a more vulnerable position than would have otherwise been the case. Partly, this is because any agreement will not only need to be followed by a parliamentary vote of approval but also the more detailed work around implementation on which it could still stumble. And, then, there is still the risk of a no deal outcome. In view of this, we think that it is unlikely that the MPC will increase interest rates before May 9. Brexit uncertainty has featured heavily in the latest round of RICS surveys. Contributors to the RICS Residential Market Survey have citied this as one of the main reasons behind subdued activity alongside affordability constraints and lack of available stock. Indeed, falling buyer demand seems to be filtering through to a weaker national price trend with the RICS headline price balance moving to -% in October 8, the softest reading in around six years, echoing the moderating price picture implied by lenders such as Nationwide and Halifax. Alongside this, the RICS Agreed Sales indicator points to the softer trend in sales transactions continuing well into the new year. In the lettings market, RICS contributors have noted that changes to the tax treatment of buy to let properties has been a key driving force behind the decline in the supply of rental stock. As a result, rents are expected to rise by 3% on average over the next five years, surpassing price growth, which is projected to be %. Meanwhile, UK commercial property is increasingly being shaped by declining interest for retail and a strengthening industrial sector across both the occupier and investment sides of the market. The combination of the two has resulted in a flatter trend in headline rental and capital value expectations in the RICS Q3 8 Commercial Property Survey. Forward looking indicators suggest that this picture is unlikely to change in the medium term. Challenges across the retail sectors are expected to intensify, whilst solid capital and rental value gains are projected for industrial assets. Since the Brexit vote, respondents to the survey have been asked if they have seen any evidence of firms looking to relocate at least part of their business away from the UK as a result. Significantly, the proportion stating that they have seen evidence of this type of activity has steadily risen in the first three quarters of 8. Turning to the construction sector, the RICS workloads indicator in Q3 8 Construction and Infrastructure Market Survey continued to signal a pick-up in output consistent with the firmer trend in the official data. That said, behind the headline figures, financial constraints and skill shortages were once again cited as one of the main impediments to activity with many contributors expressing concerns over what Brexit will mean for the hiring of skilled workers across the industry. Partly as a result of this, expectations for profit margins have flatlined despite workloads still being projected to rise. RICS Economics 8 Q 8

5 UK Economy. Despite quarterly GDP growth picking up to.6% in Q3, from.% in Q, the expansion has still slowed noticeably over the past two years. Indeed, the UK has moved from being near the top of the G7 growth league table in 6 to being currently positioned near the bottom.. Looking ahead, OBR forecasts point to only a modest improvement over the medium term. The annual growth rate is projected to range from.% to.6% between 9 and 3. With world trade growth expected to ease in the meantime, it looks as if slightly more challenging conditions lie ahead for UK exporters even before any potential changes to the trading regime following Brexit. 3. Compared to March s spring statement, the OBR downgraded its borrowing projections for the current fiscal year by.9 billion, allowing the Chancellor to announce a sizeable fiscal giveaway in the Budget. Still, borrowing is expected to fall from.9% of GDP in 7/8 to.% in 8/9. Further out, the deficit is projected to rise slightly in 9/ but to fall steadily thereafter. Chart GDP Annual % change EU Referendum 3 Range of Growth in G7 Countries* UK GDP *consisting of UK, US, Japan, Canada, Germany, Italy and France Source: OECD Chart Chart 3 Annual % change OBR Forecasts 39 % of GDP Fiscal Outlook Public Sector Receipts Total Managed Expenditure 3 UK GDP UK GDP per capita World Trade in Goods and Services 38 =.9 =. =. =. =. =.9 =.8 37 Public Sector Borrowing /8 8/9 9/ / / /3 3/ Source: OBR Source: OBR RICS Economics 8 Q 8

6 UK Economy. Although the unemployment rate has fallen consistently since, reaching a 3 year low of % in August this year, productivity growth remains well below pre-crisis norms. Indeed, output per hour worked has risen, on average, by just.% per annum over the past decade (down from.% between 998 and 8). The recent sluggish trend in business investment does not bode particularly well for the prospects of a turnaround in productivity going forward either.. Consumer Price Inflation (CPI) has continued to edge lower over the course of this year, with the impact of the weakness in the currency following the referendum having run its course. In September, CPI stood at.% and most forecasts point to this rate subsiding further over the coming twelve months. 6. As inflationary pressures ease, the OBR expects real disposable income growth to gain momentum in the medium term which should help to support household consumption over the coming years. Chart Labour Market % Annual % change Unemployment Rate (LHS) Productivity (RHS) Source: ONS Chart Chart 6 3 Annual % change Inflation Forecasts Annual % change Households.... OBR Bank of England** Oxford Economics* IMF. Real Household disposable income Household consumption 8 9 *Fourth quarter year on year growth rate ** Fourth quarter year on year growth rate based on market interest rates Source: OBR, Bank of England, Oxford Economics, IMF Source: OBR 6 RICS Economics 8 Q 8

7 Housing market 7. Having remained very close to zero over the past five months, the RICS headline price balance slipped to -% in October, the weakest reading in nearly six years. As such, this series is now signalling a marginally negative trend for national house prices for the coming months. That said, this headline measure is still being heavily weighed down by negative sentiment across London and the South East while prices continue to rise in other parts of the UK. 8. With respondents to the RICS survey reporting new buyer enquiries to have seen a renewed decline in each of the last three months, the number of mortgages being approved looks set to fall in the near term. 9. The proportion of housing transactions accounted for by new builds has risen quite noticeably since the Help to Buy (HTB) equity loan scheme was introduced in 3. However, with the government recently announcing HTB will be ending in 3, it remains to be seen how this will impact the overall market at that point. Chart 7 RICS House Price Balance and Land Registry House Prices Net balance % RICS House Prices - adv. 6m (LHS) Land Registry UK House Price Index (RHS) Source: Land Registry, RICS Chart 8 Chart 9 8 RICS New Buyer Enquiries (NBE) and Bank of England Mortgage Approvals Net balance % 3 % New Build Sales as a % of Total Transactions Introduction of Help to Buy Equity Loan RICS NBE adv. 3 months (LHS) Mortgage Approvals (RHS) Source: Bank of England, RICS Source: Land Registry 7 RICS Economics 8 Q 8

8 Housing market. The combination of Brexit uncertainty, softer buyer demand and lack of available stock on the market has resulted in the average time taken to complete a sale (from listings to completion) rising to approximately 9 weeks. This is now the highest duration recorded for this indicator since the series was introduced in February 7.. In the lettings market, the RICS New Landlord Instructions series has recorded negative readings for ten straight quarters, seemingly impacted by changes in the tax treatment of buy to let properties. Alongside this, tenant demand has continued to rise modestly in 8. Given these dynamics, rents are expected to increase in the coming months with the RICS gauge pointing to rents rising by around.% in the year ahead.. Both near and medium term expectations imply that rental growth will outstrip that of prices. Indeed, rents are projected to increase by an average of 3% nationally over the next five years, whilst house price inflation is expected to be around % on the same basis. Chart RICS Average Time From Listing to Completion Weeks Jan Feb Mar Apr May Jun Jul Aug Sep Oct Source: RICS Chart Chart England Rent Expectations and Private Rents RICS Price and Rent Expectations 6 Net balance % Annual% change Average annual expected change Year Rents* year Prices* Month Rents* Month Prices* 3 - RICS England Rent Expectations adv. quarters (LHS) - ONS England Rental Index (RHS) Source: ONS, RICS * 3 month rolling average Source: RICS 8 RICS Economics 8 Q 8

9 Commercial property sector 3. Headline rental expectations from the RICS UK Commercial Property Market Survey continue to signal rental growth will grind to a halt at the all-sector level by the middle of 9. That said, the sector breakdown shows still solid expectations in the industrial sector are being offset by a firmly negative outlook across the retail portion of the market.. Indeed, demand from tenants looking to occupy retail space fell for the sixth consecutive quarter in Q3. Alongside this, availability of vacant retail space remains firmly on the up. As a result of these dynamics, near term expectations remain entrenched in negative territory, pointing to retail rents, on average, declining by almost % in the coming year.. Within the retail segment, commercial investment volumes have declined most sharply for shopping centres, standard shops and supermarkets over the past two years. By way of contrast, the recent trend has been much flatter for retail warehouses, although this is still significantly below volumes seen in 6. Chart 3 RICS Rent Expectations and CBRE Rental Values RICS UK Rent Expectations adv. 3q (LHS) CBRE UK Rental Values (RHS) Source: CBRE, RICS Chart Chart Retail Rental Values 6, m Value of UK Commercial Investment Transactions,, - - 3, - -, -6-8 RICS Retail Rent Expectations adv. q (LHS) CBRE Retail Rental Values (RHS) -6, Shopping Centres Retail Warehouses Shops and Supermarkets Source: RICS, CBRE Source: Property Data 9 RICS Economics 8 Q 8

10 Commercial property sector 6. In each quarter since the Brexit vote took place, survey participants have been asked if they have seen any evidence of firms looking to relocate at least some part of their business as a result. Interestingly, the share reporting they have seen evidence of this type of activity has risen to % in Q3 8 results, up from 8% and % in first and second quarters of the year respectively. 7. Despite Brexit worries seemingly having a greater impact on decisions being taken in the occupier market, demand from foreign investors remains reasonably solid. In fact, the value of UK commercial investment purchases has actually risen over the first three quarter of Even so, headline capital value expectations have moderated over the past year, pointing to little growth in all-sector commercial real estate prices by the first quarter of 9. Nevertheless, similar to the occupier market, the weakness in retail is continuing to bear down on the headline average, whilst capital values are still expected to rise in the industrial sector. Chart 6 Have you seen any evidence of firms looking to relocate away from the 3 % of respondents UK in response to Brexit? Q 8 Q 8 Q3 8 Source: RICS Chart 7 Chart 8,, m Value of UK Commercial Investment Purchases Overseas Domestic 6 UK Capital Values 3,, - - -, -6 RICS Capital Value Expectations adv. q (LHS) - -8 CBRE Capital Values (RHS) Source: Property Data Source: CBRE, RICS RICS Economics 8 Q 8

11 Construction sector 9. Following a weak opening to 8, it looks as if activity in the construction industry has recovered over recent months, with the ONS reporting output rose by.% in Q3 following growth of.8% in Q.. On a sectoral comparison, year on year growth in private housing and infrastructure work outstripped all other areas. Contributors to the RICS survey have also repeatedly signalled a solid rise in both of these sectors. That said, a positive trend in the Q3 survey was also noted across private commercial workloads, suggesting new work in this segment could rebound somewhat from its recent decline.. The RICS headline workloads series is now pointing to a slight pick-up in the pace of construction output beyond Q3, with the net balance rising to +% in Q3 from +% in Q (this series has a three quarter lead to official new work measure). Chart 9 Quarterly % change 3 - Construction output Source: ONS Chart Chart % change New Work Sector Breakdown Year on Year Three Month on Three Month 6 Net balance % Construction Workloads Annual % change Private Housing Infrastructure Public Housing Private Industrial Private Commercial Other Public RICS Total Workloads adv. 3q (LHS) - ONS All New Work* (RHS) Source: ONS * quarter sum Source: ONS, RICS RICS Economics 8 Q 8

12 Construction sector. Further ahead, a net balance of 33% of contributors expect workloads to rise over the coming twelve months, albeit this optimism has been slightly tempered compared to the Q results. At the same time, confidence regarding growth in profit margins has deteriorated, with the net balance of -3% the first negative reading in over six years. 3. More than two thirds of contributors to the survey cite financial constraints as the most significant impediment to market activity, ahead of planning and regulation and skills shortages.. Anecdotal evidence from respondents suggests Brexit uncertainty is having a negative influence on sentiment across the construction industry, with concerns cited regarding recruitment and retention of skilled workers. The net balance of respondents reporting a lack of sufficiently skilled labour ticked up in the latest results, pointing to unfilled vacancies in the industry increasing to almost 3, in a year s time. Chart Month Expectations 7 Net balance % Workloads Profit Margins Source: RICS Chart 3 Chart Proportion of respondents citing Financial Constraints as an impediment to activity % of respondents 7 6 % reporting 'yes' RICS Skills Shortages and ONS Unfilled Vacancies RICS Skills Shortages Average adv. year (LHS) ONS Construction Unfilled Vacancies (RHS) Q 7 Q 7 Q3 7 Q 7 Q 8 Q 8 Q3 8 Source: RICS Source: RICS, ONS RICS Economics 8 Q 8

13 UK Property Market Chart Book 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) The Economics Team Kisa Zehra, Economist kzehra@rics.org + () Simon Rubinsohn, Chief Economist srubinsohn@rics.org + () Jeffrey Matsu, Senior Economist jmatsu@rics.org + () Sean Ellison, Senior Economist sellison@rics.org Tarrant Parsons, Economist tparsons@rics.org + () Janet Guilfoyle, Surveys Administrator jguilfoyle@rics.org + () RICS Economics 8 Q 8

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