Like the recurring dinner table discussion about house price growth, it seems everyone is trying to second guess the timing of the next downturn.
Every possible doomsday scenario is being mentioned: an upward-trending yield curve; the increasing strength in sterling; and that property yields are now the same as, and in some cases lower than, they were in 2007.
There is no doubting the strength of the property market both here and in most core European markets – there is an excess of low-cost capital seeking exposure to real assets and a limited number of investors willing to release them. Naturally, this is driving prices higher and yields ever lower, but how long this will last in a rising-rate environment remains the question.
While it is important to be mindful of these factors, history suggests it is the economic positives that we should be watching more carefully when trying to predict the next change in the market.
Above average GDP growth, low levels of unemployment, and wage growth that is not matched by increased productivity are the typical signs of a market peaking, yet a worldwide abundance of these economic elements seems a long way off.
GDP growth across the western world is weaker than most would wish for, inflation seems to be an aspiration not a problem, and unemployment is still above 5% in the UK and far higher in many other European economies. There are signs in the US, the UK and increasingly in Europe that quantitative easing has worked and growth is returning, but we still appear to be closer to the beginning of an economic cycle than approaching the end of one.
So, while many people have been citing factors such as “the abundance of liquidity” as the rationale for fearing the worst, I am struggling to see why we should not remain more positive about the prospects for the real estate market in the short to medium term.
The capital cycle, driven by QE, may be nearing the end as the Federal Reserve and Bank of England start to tighten monetary policy, but we should not lose sight of the fact that rising rates are a sign that economic strength is returning to OECD countries.
Returns may not be as easy to generate as they have been in the past two or three years and are unlikely to be of the same magnitude, but nonetheless a 3.5% income yield and 2.5%-3% income growth remain an attractive real return when inflation is likely to remain low for some time.
Of course, there may be an unforeseen event that causes a dramatic liquidity flight to cash, but we should be looking for much stronger economic positives as a prelude to change, and there appears to be no sign of these coming in the immediate future.
I am therefore going to continue to search for these stronger than expected economic positives before I change my view of a continued modest growth story, and ignore the doomsday calls of a sharp downturn based simplistically on historically low property yields.
Richard Dakin is managing director of CBRE Capital Advisors
