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Although technical factors appear to have triggered the stock market correction, inflation concerns were the main driver behind the stock market slump. 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, rising labor demand is putting pressure on wages and salaries, but it is still a long way from a sharp acceleration in inflation rates. The US Department of Commerce’s recommendation in its investigation to restrict aluminum and steel imports for national security reasons, meanwhile, is a reminder that the risk of escalating trade tensions has a significant impact on real estate investments.

We do not assume that the probability of risks has increased significantly in light of these events. However, we argue that higher volatility combined with uncertainties about the uncertain future prospects of US trade policy is not an environment in which we should risk everything for a company, but rather look for returns by seizing opportunities in the real estate market.

It would be more than natural that unjustified price increases would be corrected over time. Some observers believe that rising inflation may have played an important role in the recent sell-off in the equity markets. However, higher inflation suggests the economy is overheating, and rising wages could lower profit margins. Obviously, none of the cases are at this point in time. However, historical evidence shows that periods when inflation starts to rise often lead to volatility in real estate markets and, on average, returns are low. Finally, but more importantly, higher interest rates could hurt property prices if they reflect rising risk. Higher rates are likely to be less relevant if they result from higher growth.

For now, we expect the impact of rising interest rates on the property outlook to be limited. However, a sustained sharp drop in house prices could be linked to slightly slower growth, either because the economy is expecting a slowdown or because the economic downturn itself is dampening growth.

The impact of rising interest rates on growth also depends on the factors that drove interest rates up. The rise in interest rates could be the result of stronger growth momentum, although the economic impact is understandably limited. However, if higher interest rates reflect rising risk, for example, growth may suffer more. The financing conditions remain very loose and the interest rates are relatively low. This should further support economic growth.

We are therefore sticking to our scenario of sustainable economic growth: (1) a higher global economy, (2) rising capital investments, (3) a very gradual adjustment of monetary policy in the USA. We recognize the risks of higher protectionism as recent announcements are a reminder that trade disputes could escalate significantly. At this point it remains to be seen what measures the US will take and how other countries could react.

Since the start of the Great Recession in 2008, most have averted the specter of deflation with conventional and, above all, unconventional monetary policy measures. Inflation in the US averaged around 1.5%, with a spread of -2% in mid-2009 to around 3.8% at the end of 2011. US consumer price inflation is currently 2.1%.

In the US, the government is embarking on a path of fiscal stimulus and more trade tariffs and trade disputes could drive inflation higher. However, several factors are keeping underlying inflationary pressures in check for the time being, including the persistently cautious collective bargaining behavior of households, corporate pricing and changes in the composition of the labor market. Additionally, recent readings have likely overstated current price trends (the surprise inflationary weakness in 2017). Outside the US, wage and price developments have barely changed in recent months.

Against this background, we do not expect any surprises in the course of 2018. The Fed is likely to gradually hike rates with caution, depending on US labor market tension, signs of accelerating wage dynamics and the potential impact of higher financial markets on volatility in economic growth.

In addition, tax policies that promote the competitiveness of American businesses and attract foreign direct investment that increase the potential growth rate of the United States should also support the dollar. At the same time, just as many factors speak for a glorious future for the real estate markets

According to the Federal Reserve Bank of New York, the probability of a recession for the US economy is currently around 4% and will reach around 10% by the end of 2018. In our view, the gradual tightening of monetary policy limits inflation expectations and cautious investment demand will keep real interest rates relatively low. We therefore prefer real estate investments in 2018.

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Source by Eugene Vollucci