Stronger growth in Q2 paved the way for MPC‘s rate …...Monthly RICS Residential Market Survey September 11-Oct-18 Quarterly RICS Construction Market Survey Q3 2018 18-Oct-18 Quarterly

Economics

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Stronger growth in Q2 paved the way for MPC‘s rate hike

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Q3 2018

UK Economy and Property Market Chart Book

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2 © RICS Economics 2018 Q3 2018

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2



ContentsEconomic outlook................................................................................4

UK Economy.......................................................................................5-6

Housing market..................................................................................7-8

Commercial property sector.............................................................9-10

Construction sector.........................................................................11-12

Market surveys and reports................................................................13

RICS Survey Release Dates

Frequency Survey Period covering

Release date

Monthly RICS Residential Market Survey July 09-Aug-18

Monthly RICS Residential Market Survey August 13-Sep-18

Monthly RICS Residential Market Survey September 11-Oct-18

Quarterly RICS Construction Market Survey Q3 2018 18-Oct-18

Quarterly RICS UK Commercial Property Market Survey Q3 2018 25-Oct-18

Quarterly RICS Global Commercial Property Market Survey Q3 2018 25-Oct-18



Economic outlookThe Bank of England’s decision to increase interest rates in August (for the second time in ten months) was widely anticipated by financial markets. Although the lacklustre performance of the economy in Q1 had prevented the MPC from hiking interest rates back in May, recent rhetoric had suggested the committee would be keen to press on with a small tightening in policy barring any major downside surprises in the macro news flow. The fact the committee voted unanimously in favour of increasing base rates to 0.75% was largely unexpected however, with the consensus anticipating at least two dissenters. It seems the stronger growth profile of the economy in recent months gave the MPC reassurance that the softness at the beginning of the year was due to temporary (largely weather related) factors. Indeed, GDP growth edged up to 0.3% in the three months to May, from 0.2% in April. At the same time, the MPC likely took some comfort from the strong recovery in retail sales growth, suggesting the consumer backdrop may be slightly more resilient than what looked to be the case three months ago. Furthermore, business survey evidence points to GDP growth rising to 0.4% for Q2 as a whole, while Q3 appears to have started on a solid enough footing. Sluggish wage growth, despite record levels of employment, has been a key factor clouding the appropriate path the MPC should take towards monetary policy normalisation. In the latest data, solid employment growth (137,000 in the three months to May), alongside a rate of unemployment at 4.2% (the lowest since 1975), were met by the disappointment of another sub-par rise in wages. Total pay growth even eased to 2.5% in June from 2.7% in May. Although vacancies have reached a record high (824,000 in the three months to June), there still remains little evidence to suggest this is feeding through into greater upward pressure on wages. At the same time, the Consumer Price Index (CPI)

showed price growth steady at 2.4% in June with the upward contributions from higher oil and energy prices being offset by the weakest reading for core inflation since March last year. With pay growth still soft, there does not seem to be much to support core inflation in the near term now that the impact of the sterling depreciation is fading noticeably. It therefore looks as if inflation will remain close to the current rate in the coming months before strong base effects see it slipping towards the Bank of England’s 2% target around early 2019. Meanwhile, subdued business investment suggests that Brexit uncertainty is still weighing on business sentiment. Furthermore, there is little reason to anticipate that net trade will contribute significantly to GDP given that the boost to UK exports from sterling’s devaluation in 2016 has run its course. The emergence of protectionist trade policies look likely to cool global growth as well. The Inflation Report noted that there were signs of a moderation in export focused sectors alongside slowing global trade and capital goods orders. Given these economic headwinds, the next hike in Bank rate may be delayed until the middle of next year unless there is a material acceleration in wage growth or stronger GDP figures than anticipated.Even before the latest increase in interest rates, the housing market appeared to be struggling for momentum. New Buyer Enquiries, according to the RICS Residential Market Survey, have been falling throughout much of the past twelve months, although the latest figures hint at a more stable trend potentially emerging. A combination of affordability pressures and a lack of supply remain the key impediments holding back market activity. Given this, sales in 2018 seem likely to come in around 5% below last year’s total. Having said that, there were some tentative signs that supply shortfall may easing to some extent as new instructions reportedly increased for two consecutive months (for the first time in more than two years).

However, it is doubtful that this trend will be sustained as the feedback also suggests that the run rate of market appraisals remains down in comparison to last year. On the flipside, contributors have started to note a more significant drop in the supply of rental properties coming to the market, on the back of tax changes on buy-to-let investments. Over the medium term, survey participants seem unconvinced that the demand-supply imbalances will be addressed sufficiently and still expect both rents and prices to have risen firmly between now and 2023.As we have noted previously, trends across the UK commercial property market continue to vary significantly across sectors. In particular, the solid performance of the industrial segment remains in stark contrast to that of retail. The latest RICS UK Commercial Property Market Survey results suggest the challenges in the retail sector are still intensifying. Demand for retail space is now declining across all UK regions, while availability is rising sharply in some areas, causing both rental and capital values expectations to slip deeper into negative territory. Although the outlook is weaker within secondary locations, sentiment has also turned downbeat across prime centres during Q2. With regards to the construction industry, the headline workloads indicator from the RICS Construction Market Survey has repeatedly signalled steady growth, even if official figures have painted a more volatile picture. That said, the latest estimates from the ONS now imply that output rebounded by 2.9% between April and May, although this still leaves total work flat on an annual basis. Surveys of purchasing managers in the construction sector have been more positive of late however, pointing to a strong rise in output during July. According to all sources, the private housing segment has consistently seen the fastest rise in output over the past few years although, even with this, the government’s target of 300,000 new homes per year still seems a long way off.



UK Economy1. The new monthly GDP estimates from the ONS show growth edging up

to 0.3% in May, from 0.2% in April, signalling a pick-up in momentum after the economy slowed in the first quarter of this year. Looking ahead, survey evidence, such as the composite Markit/CIPS PMI, point to a stronger profile for growth in Q2.

2. Meanwhile, with the impact of 2016’s sterling depreciation starting to fade, the trend in export volumes has been more or less flat. In fact, over the past three months, the year-on-year growth rate has averaged less than 0.2%. That said, despite a rise in protectionist policies, global economic growth is still reasonably firm, which at least provides a favourable backdrop for UK export demand going forward.

3. The headline inflation rate has remained steady at 2.4% over the past three months with soft core inflationary pressures offsetting higher oil and energy prices. Consensus forecasts envisage inflation falling towards the Bank of England’s 2% target around early 2019.

-20

-15

-10

-5

0

5

10

15-10

-5

0

5

10

15

20

25

2010 2011 2012 2013 2014 2015 2016 2017 2018

Exports & Sterling

Goods and Services Exports (LHS)Effective Exchange Rate (inverted RHS)

Annual % change

Source: ONS, Bank of England

46

48

50

52

54

56

58

60

62

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

2015 2016 2017 2018

GDP & All-Sector PMI

GDP (LHS)

All-Sector PMI (RHS)

Monthly % change Index

Source: ONS, Markit

-1

0

1

2

3

4

5

6

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

UK Inflation

Headline Inflation

Inflation target

%

Source: ONS, HM Treasury

HM Treasury

Concensus Forecast

Chart 1

Chart 2 Chart 3



UK Economy4. The employment rate reached 75.7% in April, the highest since records

began in 1971, whilst the jobless rate remained steady at 4.2%. This trend was largely driven by increasing participation in the labour market, with the rate of economic inactivity reaching a record low of 21%.

5. There has been little evidence to suggest a build-up in wage pressures despite most measures of slack pointing to an increasingly tight labour market. The vacancy ratio (the number of unemployed persons per vacancy) reached a record low 1.7, whilst survey measures continue to point to a strong demand for labour. It remains to be seen whether this will begin to translate into greater wage gains going forward however.

6. Brexit related uncertainty continues to weigh on business sentiment with the average year-on-year change in investment moderating notably since the EU Referendum. Given the continued lack of clarity regarding the UK’s future relationship with the EU, it seems unlikely that this picture will change materially over the coming months.

0

1

2

3

4

5

6

7-4

-3

-2

-1

0

1

2

3

4

2002 2004 2006 2008 2010 2012 2014 2016 2018

Labour Market Tightness

Bank of Englands Agents' Score of RecruitmentDifficulties (LHS)Vacancies - Unemployed Ratio (RHS)

Agents' Scores Ratio (inverted)

Source: Bank od England, ONS

19.5

20

20.5

21

21.5

22

22.5

23

23.5

24

67

68

69

70

71

72

73

74

75

76

2001 2003 2005 2007 2009 2011 2013 2015 2017

Employment

Employment Rate (LHS)

Economic Inactivity Rate (RHS)

%

Source: ONS

%

-6

-4

-2

0

2

4

6

8

10

12

14

2010 2011 2012 2013 2014 2015 2016 2017 2018

Business Investment

Annual % change

Source: ONS

Average

Chart 4

Chart 5 Chart 6



Housing market7. The RICS headline price balance has remained in a tight range of -/+7

since the beginning of 2018 suggestive of a further moderation in the official measure of house price inflation through the rest of this year.

8. The regional picture remains highly varied with affordability challenges playing a key part in driving these diverging trends. Indeed, price momentum has slipped most across Greater London where the house price to earnings ratio (for first time buyers) has increased sharply over the past decade, with prices now standing at almost 10 times average earnings.

9. Given that the RICS Newly Agreed Sales net balance recorded firmly negative readings through the first half of this year, it looks as if the HMRC measure of residential sales will remain down on an annual comparison over the next few months. That said, the latest survey data points to a more stable trend emerging, albeit total sales volumes in 2018 look on track to come in 5% below those in 2017.

2

3

4

5

6

7

8

9

10

11

2002 2004 2006 2008 2010 2012 2014 2016 2018

First Time Buyer House Price-to-Earnings Ratio

NationalGreater London

Ratio

Source: Nationwide

-16

-12

-8

-4

0

4

8

12

16

-100

-80

-60

-40

-20

0

20

40

60

80

100

2006 2008 2010 2012 2014 2016 2018

RICS House Price Balance and Land Registry House Prices

RICS House Prices - adv. 6m (LHS)

Land Registry UK House Price Index (RHS)

Net balance %

Source: Land Registry, RICS

-100

-80

-60

-40

-20

0

20

40

60

80

100

-80

-60

-40

-20

0

20

40

60

80

2006 2008 2010 2012 2014 2016 2018

RICS Newly Agreed Sales - adv. 6m (LHS)

HMRC Transactions (RHS)

RICS Agreed Sales and HMRC Property Transactions

Source: HMRC, RICS

Chart 7

Chart 8 Chart 9



Housing market10. UK Finance mortgage approval data indicates that borrowing for house

purchases by buy-to-let landlords has still not recovered following the steep fall in 2016, induced by an additional stamp duty surcharge on such transactions. This chimes with RICS data on new landlord instructions, which has been pointing to a fall in the supply of rental properties for eight consecutive quarters (the longest sustained decline on record).

11. On the flipside, anecdotal evidence suggests increasing numbers of landlords may be exiting the market, which could in part explain why new instructions to sell have edged into positive territory after a twenty-six month period of decline. Nevertheless, it will take a sustained increase on this measure to alleviate supply pressures, given average stock levels on estate agents books remain near all-time lows.

12. Medium term expectations imply that demand is still envisaged to outstrip supply, with both rents and prices projected to rise firmly over the five-year horizon.

-50

-40

-30

-20

-10

0

10

20

Jan/2016 Aug/2016 Mar/2017 Oct/2017 May/2018

RICS New InstructionsNet balance %

Source: RICS

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

2013 2014 2015 2016 2017 2018

New Mortgages for House Purchases

First Time BuyersHome MoversBuy-to-Let Investors

Per month

Source: UK Finance

0

1

2

3

4

5

6

7

2013 2014 2015 2016 2017 2018

RICS Next 5 Year Expectations

Rents*

Prices*

Average annual expected change

* 3 month rolling average Source: RICS

Chart 10

Chart 11 Chart 12



Commercial property sector13. Headline rent expectations have continued to moderate, with the all-

sector net balance easing to -2% in the second quarter of the year. As such, this series is pointing to rental growth grinding to a halt (in annual terms) by the opening stages of 2019. That said, the headline numbers are being weighed down by a negative outlook for the retail sector, where a net balance of -52% of respondents expect rents to decline.

14. These negative expectations within the retail sector are a consequence of falling tenant demand and rising vacancy rates. Significantly, demand for retail space is now falling across all areas of the UK, confirming just how challenging the backdrop is for the sector currently.

15. By way of contrast, momentum remains solid across the industrial sector, with tenant demand rising for the twenty third consecutive quarter in Q2. Alongside this, availability continues to fall, while elevated rental growth expectations point to annual rental gains continuing to run above 4% in the near term.

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

GreaterLon

Wales Y&H SE EM NE CentralLon

NW East WM Scot NI SW

3 Month Retail Rent Expectations By RegionNet balance %

Source: RICS

-12

-10

-8

-6

-4

-2

0

2

4

6

8

-100

-80

-60

-40

-20

0

20

40

60

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

RICS Rent Expectations and CBRE Rental Values

RICS UK Rent Expectations adv. 3q(LHS)CBRE UK Rental Values (RHS)

Source: CBRE, RICS

-6

-4

-2

0

2

4

6

8

-80

-60

-40

-20

0

20

40

60

80

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Industrial Rental Values

RICS Industrial Rent Expectations adv. 4q (LHS)

CBRE Industrial Rental Values (RHS)

Source: CBRE, RICS

Chart 13

Chart 14 Chart 15



Commercial property sector16. Turning to the investment market, the headline investor demand gauge

from the RICS survey eased in Q2, posting a net balance of -3% (down from +12% previously). This points to a further moderation in annual capital value growth in the second half of this year, with the outlook now seemingly flat. Even so, enquiries did continue to rise in the industrial sector, but the all-property average was again pulled down by a steep decline in demand for retail assets.

17. The increased use of Company Voluntary Agreements (a form of insolvency which could see landlords faced with rental income reductions) has been well documented in the retail sector. Given this, 70% of contributors anticipate investors will be looking to scale back their exposure to the sector, while over two-thirds of respondents expect more retailers to attempt to insert CVA clauses into their contracts.

18. This troubling picture is reflected in the three year capital value expectations, with respondents envisaging values continuing to fall for both prime and secondary retail assets over this timeframe.

0

10

20

30

40

50

60

70

80

Yes No Don't know

Do you expect more retailers to try to insert CVA clauses?% of respondents

Source: RICS

-40

-30

-20

-10

0

10

20

30

-100

-80

-60

-40

-20

0

20

40

60

80

2006 2008 2010 2012 2014 2016 2018

RICS Investment Enquiries and CBRE Capital Values

RICS UK Investment Enquiries adv. 3q (LHS)

CBRE UK Capital Values (RHS)

Source: CBRE, RICS

-6

-4

-2

0

2

4

6

Prime Office SecondaryOffice

Prime Industrial SecondaryIndustrial

Prime Retail Secondary Retail

3 Year Capital Value Expectations %

Source: RICS

Chart 16

Chart 17 Chart 18



Construction sector19. After a weak start to 2018 for the construction industry, there are now

perhaps some early signs of a recovery. The monthly series produced by the ONS suggests output has begun to bounce back, with both new work and repair and maintenance activity rising according to the latest figures.

20. Furthermore, the Markit Construction PMI index jumped to 55.8 in July, from 53.1 in June, the highest reading in fourteen months. This is also now reportedly above the long run average for the first time since November last year.

21. Meanwhile, the RICS Construction Market Survey results show respondents are fairly optimistic with regards to the twelve month outlook. Both total workloads and employment levels are expected to rise in the year ahead, albeit expectations are a little more modest when compared with the Q1 results. That said, profit margins are now anticipated to remain unchanged, following slightly positive expectations returned in Q1.

40

42

44

46

48

50

52

54

56

58

60

2015 2016 2017 2018

Construction PMI

Source: Markit

Index

Long-Run Average

-20

-15

-10

-5

0

5

10

15

2012 2013 2014 2015 2016 2017 2018

Construction Output

All New Work

Repair and Maintenance

Annual % change

Source: ONS

0

5

10

15

20

25

30

35

40

45

50

Workloads Employment Profit Margins

12m Expectations

Q1 2018Q2 2018

Net balance %

Source: RICS

Chart 19

Chart 20 Chart 21



Construction sector22. Workloads increased in most parts of the UK during Q2, with the North

of England alongside the South West and Wales posting the strongest pick-up.

23. Survey feedback shows growth in private housing workloads has consistently outstripped that of all other construction sectors over the past few years. However, the stability in the RICS Private Housing Workloads net balance of late suggests momentum is no longer building. With the government’s housing delivery target (300,000 units per year) still someway off, this trend calls into question the likelihood of housebuilding hitting these levels.

24. The Q2 survey has pointed to a number of factors impeding activity. Financial constraints have been reported as the most significant impediment. Concerns over planning delays and restrictive regulation also remain elevated, while skill shortages are the next most significant issue hampering growth in the sector.

-30

-25

-20

-15

-10

-5

0

5

10

15

20

-90

-60

-30

0

30

60

90

2005 2007 2009 2011 2013 2015 2017

RICS Private Housing Workloads adv. 2 quarters (LHS)

Completed Dwellings (RHS)

(Annual % change )Net balance %

RICS Workloads and Private Housing Output

Source: MHCLG, RICS

0

5

10

15

20

25

Great Britain London & SE SW & W Mid/EA North (NE,NW, YH)

Scotland Norther Ire.

Net balance %Workloads - Regional Breakdown

Source: RICS

0

10

20

30

40

50

60

70

80

Insufficientdemand

Weatherconditions

Shortage oflabour

Shortage ofmaterials

Financialconstraints

Competition Planning &regulation

Q1 2018Q2 2018

% answering "yes"

Factors Limiting Building Activity

Source: RICS

Chart 22

Chart 23 Chart 24

© RICS Economics 2018 Q3 2018

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Market Surveys & Reports The Economics Team Why the RICS surveys?“The RICS poll - considered one of the most reliable guides to movements in house prices.” Financial Times

“The RICS survey - the best short-term lead indicator of house prices and activity in our view.” Goldman Sachs

“The RICS Survey has been a good leading indicator for the direction of and inflection points in the IPD index, and therefore the UK commercial property market overall.” Morgan Stanley

“The RICS Commercial Property Survey is an excellent predictor of future IPD total returns.” North Row Capital

Download RICS Economic market surveys and reports at www.rics.org/economics• UK Residential Market Survey (monthly)

www.rics.org/housingmarketsurvey• UK Construction Market Survey (quarterly)

www.rics.org/constructionmarketsurvey• UK Commercial Market Survey (quarterly)

www.rics.org/commercialmarketsurvey• UK Rural Market Survey (semi-annual)

www.rics.org/ruralmarketsurvey• Global Commercial Market Monitor (quarterly)

www.rics.org/globalpropertymonitor• RICS / Ci Portuguese Housing Market Survey (monthly) www.rics.org/portuguesemarketsurvey• Hong Kong Residential Market Survey (monthly)

http://www.rics.org/hong-kong-residential-market-survey

Kisa Zehra, Economist [email protected] +44 (0)20 7695 1675

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Documents

Stronger growth in Q2 paved the way for MPC‘s rate …...Monthly RICS Residential Market Survey September 11-Oct-18 Quarterly RICS Construction Market Survey Q3 2018 18-Oct-18 Quarterly