The property sector put on a brave face this week as it wrestled with a faltering European economy that will likely require an ECB monetary infusion to stave off degeneration into deflation. But even then, an economy kept alive artificially could be likened to nothing more than a zombie.
The property sector put on a brave face this week as it wrestled with a faltering European economy that will likely require an ECB monetary infusion to stave off degeneration into deflation. But even then, an economy kept alive artificially could be likened to nothing more than a zombie.
Zombies have a habit of popping up all over the place these days.
The walking dead who want to eat your brains have successfully crossed over from cheesy late-night horror movies to wider popular culture. Recently they breathed new life into Jane Austen’s classic, resulting in Pride and Prejudice and Zombies, while another book offered a zombie apocalypse survival guide. There have even been reports from Haiti and the US of laws being introduced to deal with the potential menace.
All stuff for a good chuckle. But it is no laughing matter when similar accusations of being undead are being levelled at the Continent’s economy, which is struggling to get back to a semblance of normality after going from boom to bust in the aftermath of the global financial crisis.
This week anaemic growth forecasts for Europe were cut further and the prospect of quantitative easing to keep the wheels of industry and business turning in the eurozone came a step closer after ECB chief Mario Draghi pledged to undertake more aggressive policy measures if necessary. But some commentators claim Draghi’s hints of quantitative easing will do little to address fundamental problems with the whole Dr Frankenstein eurozone project.
Perhaps the stretched zombie analogy should be laid to rest now.
The real question remains: what does Draghi’s pledge mean for the European property sector? Will it benefit if the underlying economy is artificially kept alive by buckets of money and bluster? As Nick Spiro pointed out earlier this week in an Expert View in PropertyEU, the masters of the eurozone appear to be in denial about the true weakness of the economy. And for the property sector the Gap between sentiment and fundamentals is dangerously wide.
‘The troubling disconnect between liquidity-fuelled capital markets and struggling economies has been a persistent theme since the global financial crisis erupted in 2008. Quite often it has felt like markets and economies exist in parallel worlds. The ultra-loose monetary policies of the world’s main central banks continue to inflate the prices of assets, desensitising investors to risks which would otherwise be of far greater concern to them.’
Draghi is under intense pressure to follow the US Federal Reserve - or ‘the distorter-in-chief’ as Spiro calls it - to undertake full-blown quantitative easing involving the purchase of bonds at a time when the Fed is ending its buy-back programme and moving to raise interest rates. As widely expected, Draghi pledged on Thursday to ‘undertake more aggressive policy measures’ if necessary despite German opposition to continuous recourse to its (relative) wealth to support structurally weaker members of the Monetary Union.
INVESTOR SENTIMENT
Commenting on the ECB president’s performance Spiro noted that, ‘in the space of half an hour, investors went from questioning whether Draghi’s position was secure to never being more certain that full-blown QE is on its way’. While Draghi’s firmness appears to have assuaged investors, Spiro remains sceptical as to whether quantitative easing is the solution for the eurozone’s slowing growth. ‘Central bank largesse may have helped avert a depression in 2009, but in the last two years or so it has distorted asset prices excessively and led to dangerous levels of investor complacency eerily reminiscent of the years leading up to the financial crisis.’
By all accounts, there does not seem to be much room for complacency in Europe. While key indicators of sentiment for the global real estate market continue to improve, according to the latest publication of RIC's Commercial Property Monitor for Q3 2014, economic recovery remains patchy across Europe. The UK is seeing increasingly positive momentum while some peripheral European markets – in particular Portugal, Spain and Ireland – that were hit hardest by the 2008 financial crisis have also seen a meaningful lift in overall market confidence. But the question of whether rising confidence will support the outlook for rents and commercial property prices over the medium term remains as pertinent as ever. As RICS’ chief economist Simon Rubinsohn put it: ‘Whether the more positive trend can be sustained will depend, critically, on whether the macro headwinds can be resisted.’
It can be fashionable to rubbish positive sentiment. It is, however, worth bearing in mind that the gloom-and-doom merchants were wrong with their dire predictions of the death of the euro…weren’t they?
Cormac Mac Ruairi
Senior editor PropertyEU