French economic growth is set to step up a pace in 2017 and 2018. It will benefit from a more buoyant world context, which has been visible in the surge in world trade over recent months. It will also be driven by activity in the euro area, which is enjoying a situation that we have not seen for some time. Business trends are picking up across all countries in the zone, even Italy, and business leaders are now much more optimistic than they were a few months ago.
The situation in the Eurozone is also characterized by fiscal policy that has become neutral, and monetary policy that is set to remain accommodative for a while to come. This means that for such times as inflation stays well below the ECB’s 2% target, the central bank will not change its monetary approach. To add to this, oil prices are not expected to rise sharply, so long-term rates will still stay very low. This overall context promotes risk-taking and encourages investment.
The logic behind the brutal adjustment on property funds in the UK is quit simple.
For non resident investors, the deep depreciation of the sterling has led to lower or negative returns. At the same time the UK economic and financial environment appears gloomy and uncertain creating incentives to limit portfolio exposure to assets of this country.
The property market is a market with low liquidity even in normal time. It takes time to sell an asset; that’s a major characteristic of this market. When there are massive flows of redemption this low liquidity vanishes. What is new, is that the environment and expectations are gloomy, therefore nobody wants to invest in this type of asset. It’s even harder on this market as prices are already very high. What could be the return for a new buyer? That’s the important question. Clearly the answer is probably negative and nobody wants to take this type of risks.
Therefore property funds are not able to manage the flow of redemptions. By definition this market has low liquidity. In the current environment this liquidity has vanished. The mechanism of adjustment is blocked: lots of sellers but no buyers. That’s what we’ve seen in recent days.
There are two options: one is to let the invisible hand in an environment in which the currency will continue to drop (see here). The possibility of a run is not null in that case. It will be the role of the central bank to intervene. The Bank of England is more proactive after the Brexit and it will have to continue.
In a post yesterday (see here) I said that one major issue for the United Kingdom, after the Brexit, would be the financing of its current account deficit. The deficit is close to 7% of the GDP and it’s funding is through inflows of capital on financial markets and on real assets (companies, real estate).
What has happened yesterday on property funds (see here) is a source of concern when we have the current account issue in mind. This could be the first step for difficulties.
Capital inflows to the UK may be discouraged by a poor outlook for the economy and by uncertainties on the economic and political process of the Brexit. This is why it will be difficult to finance the current account and the risk of its unsustainability that I mentioned in the post. At the top of that you can add outflows of capital from investors who have been hurt by a severe depreciation of the sterling and therefore of their assets (in euro) in an environment of poor economic prospects.
The risk therefore is to exit from these funds and to accelerate the depreciation of the sterling, creating a dynamic of run. The role of the Bank of England and of all the central banks will be to avoid a run by managing the post referendum situation.
The real estate market is at the heart of the U.S. recovery. The rebound and reactivation of this market are clearly visible on the evolution of home sales. This is the chart below.
The rebound since summer 2010 is spectacular even if it does not compensate, far from it, the drop observed since the beginning of the crisis in 2006/2007. Specifically, the recent downturn reflects the impact of rising mortgage interest rates seen since the late spring. Continue reading
Real estate prices for the first quarter of 2013 have just been published. It’s interesting to compare them on a long time period with other prices or income. That’s what I’ve done in this post. I have taken households’ disposable income, the CAC 40 stock index (ex-dividends) and the consumption price index. I took attention to avoid taking a peak or a through as starting date. That’s why I’ve started in 1990. But the comparison really starts in 1996 as real estate price index published by INSEE begin in 1996.