Here are my thoughts on the real estate market and the late cycle economy, which I shared at CBREs Client Forum on September 26, 2018.
The Nordic real estate market has an underlying strength, but it is also facing challenges and growing imbalances.
In the next few years, the markets support in a global recovery. The US economy is boosted by tax cuts which also provides support for the business climate, although the rising indebtedness is worrying in the long run. In Europe, the structural reforms in the former crisis countries, not least Spain, Ireland and the Netherlands, means that growth is strengthened. In both the US and Europe, low interest rates support investment and consumption. In Asia, both China and India are doing relatively well. Overall, the world economy supports continued good demand also in the Nordic region in the coming years.
At the same time, the risks are increasing. Due to the very low unemployment, the central bank is likely to tighten the monetary supply in the United States. Unless productivity increases faster, interest rates need to be increased gradually. A rising dollar can then put pressure on vulnerable emerging countries such as Turkey, South Africa and Brazil. Should the political uncertainty in Italy increase and the country seriously consider leaving the euro, a new euro crisis may develop.
The next year will support the world economy, but at the same time the risks of a new decline will increase.
The long-term trend for the real estate market is dominated by the ongoing urbanization in the Nordic region. Out of the cities that have grown fastest in Europe in the last 5 years, the Nordic countries dominate. Stockholm, Gothenburg, Malmö, Uppsala, Copenhagen, Oslo, Bergen and Helsinki all belong to the fastest growing urban areas in Europe. With rapid population growth and increasing production, the demands grow. As building regulations and rental regulations hinder housing supply, demand surpluses are almost permanent. Low interest rates enable households to increase their indebtedness, as long as property prices rise. The activity in the construction sector is also strong and the banking sector has high profitability on housing loans.
In Sweden, we are likely to get a weak and incapacitated government that is unable to manage the basic structural problems. As urbanization will continue and growth will remain strong in the coming years, imbalances will also grow.
The challenge for the real estate sector is to continue investing, to meet increasing demand while increasing the imbalances and risks in the sector. It is becoming increasingly important to stress test investments and the own balance sheet. Requirements for new investments should be gradually tightened and strengthened in the balance sheet.
My conclusion is that the real estate sector is still interesting, but it is becoming more and more important to keep track of the risks in the coming years.