RICS Global Real Estate Weekly

Next week a flurry of economic data is released in China, namely consumer price inflation, fixed asset investment (FAI), industrial production and retail sales. These economic statistics released on Friday 9th will help provide a clearer picture of China’s moderating economic growth and of the extent of the slowdown in the property market.

The softening trend in the economy continued in Q4 2011. Output growth slowed slightly to 8.9% from 9.1% in the previous quarter, mainly due to a deceleration in FAI growth. Higher-than-expected data on industrial production and retail sales for December partially offset this moderation. Despite a slight pick up in January, inflation continues to remain within the official target range of 4-4.5% due to easing growth momentum and a moderation in commodity/food prices which peaked in July. In view of China’s deteriorating export outlook and intensifying property market concerns, we believe slowing output growth is expected to continue in the next several quarters. That said, the current indicators still point to the soft landing scenario. As inflationary pressure is alleviating, the policy shift towards supporting growth is likely to continue through 2012 as evidenced by the second reserve requirement ratio reduction (of 50bps in mid-February) since last November. China’s FAI growth continued to slow in December, from 24.5% to 23.8%, partially due to a cooling of the property market. Indeed, growth in housing investment eased in each successive quarter in 2011, from 34.6% in Q1 to 33.9%, 32.9% and 29.6% in Q2, Q3 and Q4 respectively. In addition, the National Bureau of Statistics indicates that 47 out of 70

Chinese cities experienced another monthly fall in property prices in January as a result of fewer transactions. The average new property price in the 70 cities was down 0.14% in January. The continued focus of policy tightening in the real estate sector does mean that housing activity will continue to moderate, as evidenced by the lesser pace of expansion in December. This is likely to continue and we believe it will be reflected in the FAI numbers.

Chinese housing investment solid, but likely to continue easing

“Housing investment

moderated to 32% in 2011”

The European Central Bank (ECB) announced this week it was going to supply more liquidity to euro area banks, in an attempt to rally sentiment in financial markets. Following the first instalment of low interest 3-year money, where €489bn was lent to banks in December, the ECB provided another €530bn to alleviate the strains on bank lending throughout the region. We have

highlighted in past Global Real Estate Weeklys the recent strains on the banking system, especially bank lending. The latest ECB bank lending survey (for Q4) showed that there had been a further tightening in credit standards, and we expect the next survey to show some modest improvement, reflecting the central bank’s stimulus.

While it appears then, that the ECB is prepared to continue supporting bank and sovereign refinancing, the monetary authority could further support the euro zone when it announces the latest interest rate decision on Thursday 8th. The bank slashed rates by 25 basis points in the November and December meetings, taking them to 1%, following weaker news flow and the re-intensification of the sovereign debt crisis. The risks were seen as being skewed to the downside, and the Q4 GDP data justified this reasoning, showing that output in the region contracted by 0.3% on the quarter. Significantly, the cuts came despite inflation sitting uncomfortably above the medium term target of close to but below 2%. The latest reading showed it creep up a touch in February to 2.7% (from 2.6%), though as activity moderates, price growth is expected to slow. This, alongside the small improvement in January’s PMI surveys, suggests the ECB may hold fire on a rate cut this month, though we won’t rule out any future monetary easing. The euro zone economy remains fragile, with peripheral European countries facing a recession this year and the uncertainty regarding sovereign debt still very much prevalent. One key risk for peripheral Europe continues to be the residential housing market. The RICS European Housing Review for 2012, which was launched this past week, shows that house prices in Ireland and Spain fell 16.7% and 9.6% respectively in 2011, while they also fell 4.1% in Greece.

2nd March 2012

“The ECB announced it would supply

fresh liquidity to euro area banks”

To be put on the automatic distribution list for the Global Real Estate Weekly, email: joshuamiller@rics.org

“47 out of 70 cities

experienced a monthly fall in property prices”

“The central bank may hold fire on a rate

cut this month”

The ECB has some scope to hold fire on a rate cut

Housing investment to continue trending down

ECB spikes the punch…again

0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009 2010 2011

FAI, TotalFAI, Housing

Source: NBS, Reuters

Annual % change

35

40

45

50

55

60

1998 2000 2002 2004 2006 2008 2010-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

Absolute change in ECB policy rate - right scale

Eurozone composite PMI survey - left scale

Seperation between expansion and contraction

Sources: ECB, Markit

Diffusion index %

risks hanging over the economy. On Friday 9th, provisional construction output data for January will be released. During the fourth quarter of 2011, the volume of output from the sector dropped by 0.5% but it, nevertheless, remained around 0.9% higher than in the same period of 2010. However, the prospects for 2012 are still fairly downbeat and we expect this to be reflected in the January figures. New construction orders did rebound strongly in the third quarter of last year (the latest available data) but still remain almost 5% down on where they were in the first quarter. As a result, we are not inclined to read too much into this. More significantly, most surveys of the sector are still suggesting sentiment is negative. The latest RICS Construction Survey showed the net balance of respondents anticipating a drop in workloads over the next twelve months. Meanwhile, the more timely monthly report from the European Commission highlights order books still languishing and, as the chart shows, employment expectations well into negative territory. The RICS submission for the forthcoming budget identifies a number of policies the government needs to adopt to help the construction sector play the key role that has been identified for it in the growth strategy. Amongst them, measures to assist small business compete, a cut in VAT to 5% on renovation and a re-instatement of Empty Property Rate Relief could help leverage investment from the private sector into infrastructure.

RICS India T +91 124 459 5400 ricsindia@rics.org

RICS Global Real Estate Weekly Canadian house building activity remains strong

The Canadian economy might be slowing but that is not holding back activity in the residential sector. Indeed, whilst housing starts did edge down slightly in January (1% on the month), building permits (a good lead indicator of future construction activity – figures for February released on Wednesday 7th) increased sharply by 11%, reaching its highest level since June 2007. It was highly skewed up by multi-family permits

(condominiums), which increased by 26% in January, and highly concentrated in the province of Ontario. The Bank of Canada (BoC) continues to express concern about the housing market, warning that the condo market in particular is at risk of over-build in major cities. Recently the deputy governor of the BoC stated that household credit growth is still strong, and warned consumers about rising levels of household indebtedness. Indeed, mortgage lending continues to grow at a healthy clip, rising 7.5% in 2011. This has led to household debt approaching levels seen in the US pre-recession, raising alarm bells for the authorities. But the chance of a US meltdown occurring in Canada is quite small, with a soft landing the more likely scenario. This can be seen from the recent moderation in the new house price index annual growth rate, which has remained at 2.5% (down from a peak of 3.3% in 2010) for the past three months. Transactions (home sales) have been broadly stable over 2011 and although rising 4.5% in January, they are still tracking their 10 year average. Additionally, the unemployment rate rose to a 9 month high in January (7.6%) and this recent weakening in the labour market should

feed into housing activity, and help to cool the real estate market going forward. Turning to monetary policy, the BoC meets next week (Thursday 8th) to set their key interest rate. Most likely they will continue their current neutral monetary stance, keeping the base rate at 1%, with market expectations of the next hike not until 2013.

“Building permits

increased by 11% in January”

“Mortgage lending

continues to grow strongly”

This newsletter contains economic and property news and analyses, edited by RICS. It should not be relied upon as professional advice and RICS accepts no liability for reliance on its contents.

RICS UK T +44 (0) 20 7695 1682 pressoffice@rics.org

RICS Americas T +1 212 847 7400 ricsamericas@rics.org

RICS Oceania T +61 2 92162333 ricsoceania@rics.org

RICS Middle East T+971 4 375 3074 ricsmiddleeast@rics.org

RICS Europe T +32 2 733 1019 ricseurope@rics.org

Housing finance growth supporting the housing market

To be put on the automatic distribution list for the Global Real Estate Weekly, email: joshuamiller@rics.org

“RICS Budget Submission sets out measures to

kick start the recovery”

RICS Asia T +852 2537 7117 ricsasia@rics.org

UK construction sector continues to labour Following the decision of the Bank of England to increase its quantitative easing (QE) programme in February, next week’s meeting of the Monetary Policy Committee (MPC) is likely to pass off fairly uneventfully. The announcement, due on Thursday 8th, will leave the base rate unchanged at 0.5% and the gilt buying programme at its new higher level of £325bn. Significantly, the key elements of the latest economic forecast from the Bank paints

a generally upbeat medium term view of the recovery process and suggest the new round of QE may well be the last one. Our judgement is that the growth projections appear a little too optimistic given some of the

“Latest EC survey shows

UK construction orders still

languishing”

Sentiment on order books and employment remains weak

-80

-60

-40

-20

0

20

2005 2006 2007 2008 2009 2010 2011 2012

Order BooksEmployment Expectations

Net balance %

Source: European Commission

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2005 2006 2007 2008 2009 2010 2011 20120

2

4

6

8

10

12

14

Housing starts - left scale

Secured household lending - right scale

Annual % growth

Source: Moodys Analytics

Units