Although it appears to have been primarily technical factors that triggered the correction in the stock market, inflation concerns have been the main cause of the stock market price decline. We have outlined such an inflation scenario and its impact on real estate investments.
In fact, the difference between current and trend economic growth is close to zero, the increase in labor demand is pushing up wages and salaries, but it is still far from a sharp acceleration in inflation rates. Meanwhile, the recommendation of the United States Department of Commerce in its investigation to restrict imports of aluminum and steel for national security reasons is a reminder that the risk of an escalation of trade tension has a significant impact on real estate investments. .
We are not suggesting that the odds of risks have increased substantially in light of these events. However, we argue that increased volatility combined with uncertainties about the uncertain future of US trade policy is not an environment in which we should risk everything in one effort, but rather seek profit by seeking opportunities in the real estate market. .
It would be more than natural for unjustified price appreciations to correct themselves over time. Some observers believe that rising inflation may have played a prominent role in the recent stock market sell-off. However, higher inflation points to an overheating of the economy and higher wages could reduce profit margins. Obviously, neither case applies 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. Finally, but importantly, higher interest rates could affect real estate prices if they reflect increasing risk. Higher interest rates should be less relevant if they are the result of higher growth.
For now, we expect the implications of rising interest rates on the real estate outlook to be limited. However, a more persistent significant drop in real estate prices could be associated with somewhat slower growth, either because the economy anticipates a slowdown or because the economic downturn itself slows growth.
The impact of rising interest rates on growth also depends on the factors that drove interest rates. The increase in interest rates could be the consequence of a greater growth momentum, in which case the economic consequences are understandably limited. However, if higher interest rates reflect increasing risks, for example, then growth may suffer more significantly. Financial conditions remain very lax and interest rates relatively low. This should continue to support economic growth.
Therefore, we maintain our scenario of sustained economic growth: (1) greater world economic activity, (2) increased 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 escalate significantly. At this point, it remains to be seen what action the United States will take and how other countries may respond.
Since the start of the Great Recession in 2008, most have warned about the specter of deflation by deploying conventional and, more importantly, unconventional monetary policy measures. Inflation in the US averaged about 1.5%, with a dispersion of -2% in mid-2009 to about 3.8% at the end of 2011. Currently, consumer price inflation in the US It stands at 2.1%.
In the US, the government is embarking on a path of fiscal stimulus, and more trade tariffs and trade frictions may cause inflation to spike. However, several factors are keeping underlying inflationary pressure in check for now, including the still cautious wage bargaining behavior by households, pricing by firms, and changes in the composition of the labor market. Also, recent readings have likely overstated current price trends (the surprising weakness in inflation in 2017). Outside of the US, price and wage trends haven’t changed much in recent months.
In this context, we do not anticipate surprises in the course of 2018. The Fed is expected to gradually raise rates cautiously depending on the rigidity of the US labor market, evidence of accelerating wage dynamics and the potential impact of a higher financial market. . volatility on economic growth.
In addition, a fiscal policy that encourages the competitiveness of US companies and attracts foreign direct investment, helping to raise the potential US growth rate, should also be supportive for the dollar. At the same time, there are so many factors that point to a glorious future for the real estate markets.
According to the Federal Reserve Bank of New York, the current probability of recession for the US economy is around 4%, going to about 10% at the end of 2018. In our opinion, the gradual tightening of Monetary policy limited inflation expectations and cautious investment demand will keep real interest rates relatively low. Therefore, we prefer real estate investments in 2018.