Although it seems that it was mainly technical factors that triggered the correction in the stock market, inflation fears were the main cause of the drop in stock prices. We have sketched such an inflation scenario and its impact on real estate investments.
Indeed, the gap between current and trend economic growth is approaching zero, the increase in labor demand is putting upward pressure on wages and salaries, but it is still far from strong. accelerating inflation rates. At the same time, the recommendation of the US Department of Commerce in its investigation to restrict imports of aluminum and steel for reasons of national security reminds us that the risk of escalating trade tensions has a significant impact on real estate investments.
We are not suggesting that the odds of risk increased significantly in light of these events. However, we argue that higher volatility combined with uncertainties about the uncertain outlook for US trade policy is not an environment in which we should risk everything on one company, but rather seek returns by pursuing opportunities in the real estate market.
It would be more than natural for unjustified price appreciations to be corrected over time. Some observers believe that rising inflation may have played a major role in the recent stock market sell-off. However, higher inflation portends an overheating economy and rising wages could squeeze profit margins. None of these cases obviously apply at the present time. However, historical evidence shows that periods when inflation starts to rise often create volatility in real estate markets and, on average, returns are meager. Last but not least, higher interest rates could affect property prices if they reflect increasing risk. Higher interest rates should be less relevant if they result from higher growth.
For now, we expect the implications of rising interest rates on the housing outlook to be limited. A more persistent significant drop in house prices, however, could be associated with somewhat slower growth, either because the economy is anticipating a slowdown or because the economic decline itself is slowing growth.
The impact of rising interest rates on growth also depends on the factors that pushed interest rates up. Rising interest rates could be the result of stronger growth dynamics, in which case the economic benefits are naturally limited. However, if higher interest rates reflect growing risks, for example, growth may well suffer more. Financial conditions remain very flexible and interest rates relatively low. This should continue to support economic growth.
Therefore, we maintain our scenario of sustained economic growth: (1) higher global economic activity, (2) increasing fixed capital formation, (3) a very gradual adjustment of monetary policy in the United States. We recognize the risks of increased protectionism, as recent announcements are a reminder that trade frictions could intensify significantly. At this point, it remains to be seen what steps the United States will take and how other countries might respond.
Since the onset of the Great Recession in 2008, most have averted the specter of deflation by deploying conventional and – more importantly – unconventional monetary policy measures. Inflation in the United States was around 1.5% on average, with a dispersion of -2% in mid 2009 to around 3.8% at the end of 2011. Currently, consumer price inflation in the United States is rising. at 2.1%.
In the United States, the government is on track for fiscal stimulus, and rising trade tariffs and trade frictions could push up inflation. However, several factors are keeping underlying inflationary pressures contained for now, including the continued cautious behavior of households in wage negotiations, corporate pricing and changes in the composition of the labor market. In addition, recent readings have likely overestimated current price trends (the surprisingly low inflation in 2017). Outside of the United States, the evolution of wages and prices has not changed much in recent months.
In this context, we do not expect any surprises in 2018. The Fed should gradually increase its rates with caution depending on the tension in the US labor market, the evidence of an acceleration in wage dynamics and the potential impact of a rise in financial markets. volatility on economic growth.
In addition, a tax policy that promotes the competitiveness of US businesses and attracts foreign direct investment, helping to increase the potential growth rate of the United States, should also support the greenback. At the same time, so many factors augur a glorious future for the real estate markets.
According to the Federal Reserve Bank of New York, the current probability of a recession for the US economy is around 4%, rising to around 10% at the end of 2018. In our view, the gradual tightening of monetary policy, expectations of Limited inflation and prudent investment demand will keep real interest rates relatively low. Therefore, we favor real estate investments in 2018.