Liam Bailey considers the challenges and opportunities that lie ahead for residential property investors in 2018
First, the good news. The global economy started 2018 in a very good place, with healthy growth in most of the world’s leading economies.
It the strongest coordinated growth spurt for almost a decade, and early indicators from the first quarter point to more of the same for the rest of the year. But before we get too excited about the prospects of burgeoning economic growth supporting higher property values, there are some not insignificant clouds on the horizon.
The Chinese and US economies in particular are showing signs of capacity constraints, which will lead to more rapid inflation.
This, together with ongoing debt accumulation, not just in China but around the world, where total private, corporate and public debt is now estimated to equate to a record 325% of global GDP, means rate rises and a more general monetary tightening will be the main economic story this year. This process will dent growth into 2019 and weigh on property performance in the medium term.
With rate rises likely in the US, China and Canada, and potentially the UK, and with the European Central Bank beginning to taper its quantitative easing purchases, the process of unwinding economic stimuli will accelerate.
Despite these moves towards tighter monetary policy, though, borrowers will still be able to lock into cheap rates of debt in 2018. The fear of higher future interest rates and higher prices may spur action by investors to crystallise purchases, partly in the hope that property lives up to its reputation as a strong hedge against inflation.
With the US set to lead the charge on global rate rises, the US dollar is likely to strengthen against most major currencies, in particular the euro, sterling and Chinese yuan.
For dollar-pegged or denominated investors, UK and European property markets will be likely to appear better value by the year end, while those from China will find US or Hong Kong property investments more expensive.
The yuan faces another big issue in that a larger than expected decline in its value versus the dollar could slow or even stall efforts to liberalise and internationalise the currency. Any slowing of this process would reduce the flow of investment funds out of China.
The impact of market restrictions is set to become more pronounced in 2018. The mix of tax hikes, outright investment bans and controls on mortgage lending aimed at foreign residential property buyers which have been felt as far apart as Canada, New Zealand and Australia, together with tighter currency controls facing would-be investors (and in particular those from Chinese mainland) is beginning to bite.
The confluence of these policies has seen overseas demand for property in some markets fall, as investors have struggled to fund purchases. More noticeable has been the shift in demand, with buyers reconsidering the markets they are willing to investigate for purchases.
This process will become more noticeable in 2018 as some recent policy moves come into operation during this year.
Tax reform in the US should prompt an increase in inbound investor interest.There is a general consensus that the reforms will spur additional economic growth. While this growth will act to raise property performance, it will be offset by rising rates and the strengthening dollar.
Brexit negotiations between the UK and the EU will undoubtedly influence investor behaviour across much of Europe, with some anticipating an uplift in residential and commercial property demand in Dublin, Paris and Frankfurt should bankers begin to relocate from the City of London.
If 2017 is anything to go by, they are likely to be in for a long wait as only a trickle of jobs so far have been reported as set for a move.
The big issue to influence all global markets will be the shift in monetary policy. But even this is unlikely to offset the impact of strong global economic growth and wealth creation in 2018 in the short term, both of which should act to support demand for property.
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