How rising house prices can support economic growth
Business optimism in markets such as China, the UK and the US has risen markedly over recent months according to the Grant Thornton International Business Report (IBR). And the most interesting aspect for me is the contribution of the real estate and construction sector to the brightening economic outlook.
In China, house prices rose in 69 of 70 major cities in September, including record rises in Beijing, Shanghai, Shenzhen and Guangzhou, and there is even hope that the third plenum of the Communist Party’s Central Committee will deliver land reform, allowing migrants in cities to buy property and those in rural areas to mortgage their homes.
Here in the UK we have seen a raft of positive economic data in recent weeks: construction output was up 1.7% in Q3 from Q2, a 4.1% increase year-on-year; mortgage approvals have reached a five and a half year high; and forecasters are predicting that the house price recovery will accelerate as schemes such as Help to Buy ramp up.
In the US, housing starts are up 19% year-on-year; a recent survey suggested that house prices climbed in nine out of ten cities in the 12 months to October, rising by 14% on average; and delinquency rates on packaged commercial mortgages have fallen.
Real estate and construction business leaders in all three economies are understandably bullish about future growth. According to the Q3 IBR results, more than half of sector executives in North America expect revenues (54%) and profits (56%) to rise over the next 12 months. The results are similarly positive in the UK (51% revenues and 45% profits) and in China (incl. Hong Kong; 50% and 42% respectively).
However, things are tougher for the sector in the eurozone, and particularly in southern Europe. Two in five eurozone business leaders in the sector are worried about a lack of demand, rising to 71% in southern Europe; well above the North America result (17%). Consequently just 25% of eurozone businesses expect to see profits climb over the next 12 months, falling to 22% in southern Europe.
And, whilst property prices in the China, the UK and the US are rising, Spain has seen a 35% drop-off since 2007. House prices in Spain were 12% lower in the first half of 2013 compared with the first half of 2012 and, with 1 million unsold properties in Spain and the banks still owning vast swathes of undeveloped land, they could yet fall as far as 50% below peak.
Rising house prices support wider economic growth by boosting the ‘wealth effect’, whereby homeowner confidence, borrowing and spending rises because homes are perceived to be worth more. Unfortunately for Spain, the sector is still some way off providing the boost to growth seen elsewhere around the world.