RICS UK Economy and Property Market Chart Book - February 2016 (1)

Economics

rics.org/economics

Global growth concerns continue to rattle markets

Sponsored by:

February 2016

UK Property Market Chart Book

rics.org/economicsUK Property Market Chart Book

2 © RICS Economics 2016 February 2016

ContentsEconomic comment .......................................................................... 3

Financial market indicators .............................................................. 4

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

Construction sector........................................................................7-8

Housing market.............................................................................9-10

Commercial property sector.......................................................11-12

Additional Resources.......................................................................13

UK Forecasts 2015 2016(f)

GDP (% avg) 2.2 2.0

Inflation (% q4) 0.2 0.9

Unemployment (% q4) 5.1 5.1

Base Rate (% q4) 0.5 0.75

IPD Commercial CV (% q4/q4) 9 5

IPD Commercial Rents (% q4/q4) 5 4

ONS House Prices (% q4/q4) 6 6

HMRC Transactions (000s) 1220 1275

Mortgage Repossessions (000s) 28 28

Construction Output (% avg) 3 3

Key Property Data Release Dates

Frequency Body Period covering Release date

M BoE Mortgage Lending Statistics December 01-Feb-16

M Markit/ CIPS Construction PMI January 02-Feb-16

M Halifax House Price Index January 03-Feb-16

M BIS Building Materials and Components January 03-Feb-16

M BoE Meeting/Minutes/Inflation Report January 04-Feb-16

Q IPD UK Commercial Property Index Q4 04-Feb-16

M RICS Residential Market Survey January 11-Feb-16

M ONS UK Construction Output December/Q4 12-Feb-16

M ONS Consumer Price Index January 16-Feb-16

M ONS House Price Index January 16-Feb-16

M ONS Labour Market Statistics Dec 17-Feb-16

Q ONS GDP and the Labour Market Q4 17-Feb-16

M CML Gross Mortgage Lending January 18-Feb-16

M HMRC Property Tranactions January 23-Feb-16

M BBA High Street Banking January 24-Feb-16

Q ONS Second Estimate of GDP Q4 25-Feb-16

Q DCLG House Building Statistics Q4 25-Feb-16

M Land Registry House Price Index December 26-Feb-16

M ONS Index of Private Housing Rents January 26-Feb-16

M Nationwide House Price Index January 28-Feb-16

Q GDP preliminary estimate Q4 28-Jan-16

M Nationwide House Price Index January 28-Feb-16

M BoE Mortgage Lending Statistics January 29-Feb-16



RICS Chief Economist Simon Rubinsohn’s view:

“It has clearly been a disappointing start to the year but I can’t help feeling the response from financial markets has been excessive. China is in a transition phase but the government there has by no means ran out of options to support the economy. And in the US, the Fed may now hold back on further policy tightening.”

UK economic output rose by 0.5% in Q4 2015 and by 2.2% for the year as a whole led by the services sector, once again, driving the growth. Meanwhile, output in the industrial production and construction sectors contracted in Q4 but output rose modestly on an annual basis.

While the UK economy is expanding faster than most developed nations, growth has slowed notably from 2014 while survey indicators point to a further cooling in the near term. Some slowdown was always likely following the above trend rate of 2014. However, disentangling this moderation from the potential impact of recent adverse global developments is difficult, and political uncertainties regarding the UK’s future in Europe will further cloud the underlying growth picture in the coming quarters.

The economy added 267k jobs in the three months to November and the unemployment rate fell to 5.1%. This is back to pre-recession levels but the headline figure hides a substantial degree of slack in the labour market. While the employment rate reached a record high in November, there are still around 740k more underemployed people at present relative to pre-crisis times (see chart on the right) and this competition for vacancies is keeping wage growth subdued.

While skills shortages have been making headlines recently and would typically be expected to add pressure to earnings growth, these shortages are concentrated in relatively small parts of the economy, such as construction. Indeed, on an economy wide basis, labour shortfalls are not out of line with pre-crisis levels. To the extent that the skills shortages being reported by industry members represent a lack of skill as opposed to labour, they may actually be another constraint on wage growth

Economic comment - Unemployment rate conceals slack in labour market

6

8

10

12

14

16

2002 2004 2006 2008 2010 2012 2014

%

Unemployed and Underemployed as % of Workforce

Source: ONS

Pre-crisis level

as employers settle for a less suitable and productive employee and pay a lower wage.

Fears over the global growth outlook continue to rattle markets with equity indices around the world falling sharply through January. These price falls are concern for policy makers given their potential to weigh on consumer confidence and reduce spending in the economy. However, the underlying cause of the volatility is perhaps

UK Labour Market Slack

more worrisome. The slowdown in Chinese growth and lacklustre euro area performance in 2015 impacted exporters around the world and lead indicators suggest a further slowing in trade volumes in early 2016.

The sharp fall in the oil price, resulting in part from weaker global growth, is keeping inflation subdued throughout the developed world. UK core inflation picked up slightly to end 2015 but underlying price pressures remain muted. Weak inflation and increasing uncertainty regarding the outlook for growth have pushed back expectations for the timing of the first UK interest rate rise in recent weeks. Market participants do not expect the MPC to lift off until well into 2017.

Lower commodity prices are tempering construction

input cost growth while wages are rising strongly in the sector. The first estimate suggests that output increased by around 3% in 2015. The Q4 RICS Construction Market Survey showed workloads picking up at a more moderate pace with the private housing and commercial sectors driving activity in all parts of the UK. Lead indicators from the survey suggest that the trend in output growth will moderate further but we expect continued expansion in the sector over 2016.

In the housing market, the December RICS survey showed an acceleration in demand growth. Anecdotal evidence suggests the Chancellor’s announcement of an extra layer of stamp duty for buy-to-let and second home purchasers has fuelled a rush to purchase before the new system commences in April. The Q4 Bank of England Credit Conditions Survey supports this view with lenders reporting an increase in demand from landlord purchasers and expecting this demand to grow further in Q1. At the regional level the picture remains broadly unchanged with surveyors reporting the firmest price growth in East Anglia.

The Q4 RICS Commercial Property Market Survey showed both occupier and investor sentiment improve once again. In the occupier market, demand for industrial space rose particularly rapidly and a shortage of quality stock is driving rental growth across sectors. Investor demand rose at a more moderate pace in the final quarter as investment volumes fell during the latter half of the year. Foreign investment into the sector decreased relative to previous quarters but overseas buyers remain the key players in the market, accounting for more purchases than all other buyers combined in Q4.



5

10

15

20

25

30

35

4070

75

80

85

90

95

100

105

110

115

2010 2011 2012 2013 2014 2015 2016

IFO World Economic Climate Index (LHS)

IIMA Market Volatility Index (RHS)

Source: IFO, IIMA

Index Index (Inverted axis)

Global Economic Sentiment and Market Volatility

80

90

100

110

120

130

140

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

FTSE

Nikkei

Eurostoxx

S&P 500

Source: Macrobond

Global Equity Indices100 = Jan 2014

20

40

60

80

100

120

140

2

2.2

2.4

2.6

2.8

3

3.2

3.4

Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15

Inflation expectations - 5 years (LHS)

Brent Crude Oil Price (RHS)

Source: BoE, Macrobond

% $ per barrel

Oil Price and UK Inflation Expectations

Worries about the health of the global economy have caused an increase in market volatility recently.

The sharp fall in the oil price over the last 18 months and uncertainty regarding the global economic outlook has resulted in a downward shift in UK inflation expectations.

Equity indices around the world have been falling sharply in recent months.

A slowdown in UK economic growth towards the end of last year and the increased global risks have led market participants to reduce their expectations for interest rates.

Financial Market Indicators - Global growth concerns weigh on markets

0.4

0.5

0.6

0.7

0.8

0.9

Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

%

Source: Bank of England

UK 1 Year Interest Rate Expectations



-6

-4

-2

0

2

4

-4

-3

-2

-1

0

1

2

2007 2009 2011 2013 2015

Survey Orders Index* (Adv. 6 months - LHS)

UK GDP (RHS)

*weighted average of BCC,PMI & CBI sector orders indices

Index Annual % change (four quarter sum)Orders Index and Output Growth

Source: ONS, EU, BCC, CBI

The UK economy grew by 0.5% in the final quarter in 2015, leading to growth of 2.2% for the year as a whole. Survey indicators point to a continued decrease in momentum in the coming quarters.

The employment rate reached a record high 74% in November.

Job numbers rose by the most in 19 months in the three months to November 2015 and the unemployment rate is back at pre-crisis levels.

However, the proportion of those who are underemployed remains elevated relative to pre-crisis levels and substantial slack remains in the labour market.

Economy - Employment continues to rise firmly but.....

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

-300

-200

-100

0

100

200

300

400

2007 2009 2011 2013 2015

Employment Growth (LHS)

ILO Unemployment Rate (RHS)

UK Employment/Unemployment3 month change (000's)

Source: ONS

%

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

-2

-1

0

1

2

3

4

5

6

2007 2009 2011 2013 2015

Retail Sales* (LHS)

Consumer Confidence (RHS)

Retail Sales*

*excluding fuel

Annual % change( 3-month average volumes)

Source: ONS, EU

Index

4

4.5

5

5.5

6

6.5

7

7.5

8

8.5

9

6

8

10

12

14

16

2002 2004 2006 2008 2010 2012 2014

Underemployment rate (LHS)

Unemployment rate (RHS)

%

Labour Market Slack

Source: ONS

%

65

66

67

68

69

70

71

72

73

74

75

1971 1976 1981 1986 1991 1996 2001 2006 2011

%

Employment Rate

Source: ONS



-100

-60

-20

20

60

100

2013 2014 2015 2016

ChinaJapanEuro AreaUSUK

Source: Macrobond

Net balance, %ZEW Global Economic Sentiment Indicators

-0.5

0

0.5

1

1.5

2

2.5

3

3.5-20

-15

-10

-5

0

5

10

15

201997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Effective Exchange Rate (Adv. 2 years - LHS)

Core CPI (RHS)

Annual % change (inverted axis)

Annual % change

Effective Exchange Rate and Core CPI

Source: JP Morgan

It is the large amount of underemployment that is keeping earnings growth subdued and this will weigh on real wages throughout the whole of 2016.

Weakness in some major global economies poses a potential threat to the UK economy this year.

Sterling appreciation over the past couple of years is one factor keeping price pressures subdued.

Although certain sectors are facing significant skills shortages, recruitment difficulties in the dominant service sector are broadly in line with pre-crisis levels.

Economy - ......unemployment rate hides significant slack

30

35

40

45

50

55

60

65

70

75

2001 2003 2005 2007 2009 2011 2013 2015

% reporting difficulties

Source: BCC

Service Sector Recruitment Difficulties150

350

550

750

950

1150-4

-3

-2

-1

0

1

2

3

4

2001 2003 2005 2007 2009 2011 2013 2015

Real Earnings (LHS)

Unemployed/Underemployedper vacancy (RHS)

Annual % change Persons (inverted axis)

Competition for Employment and Real Earnings Growth

Source: ONS



-20

-15

-10

-5

0

5

10

15

20

25

30

35

Pub. House Priv. House Infra. Pub. Other Ind. Comm. R&M

% change Jan-Nov 2015 versus Jan-Nov 2014

Source: ONS

Construction Output Growth - Sector Breakdown

The infrastructure sector continues to drive output growth.

Labour shortages and financial constraints were reported to be the biggest impediments to growth in Q4 and planning and regulatory constraints continue to delay projects.

Construction output growth looks set to moderate further with fewer surveyors reporting a rise in workloads.

Activity is rising across all parts of the UK with the English regions seeing the firmest momentum in the final quarter of 2015.

0

20

40

60

80

Insufficientdemand

Weatherconditions

Shortage oflabour

Shortage ofmaterials

Financialconstraints

Competition Planning &regulation

Q3-2015Q4-2015

% answering "yes"

Factors Limiting Building Activity - RICS Survey

Source: RICS

0

5

10

15

20

25

30

35

40

Great Britain Lon/SouthEast

SW & Wales Mid/EA North (NE,NW, YH)

Scot NI

Net balance %Workloads - Regional Breakdown

Source:RICS

-20

-15

-10

-5

0

5

10

15

-60

-40

-20

0

20

40

60

2002 2004 2006 2008 2010 2012 2014

RICS Total Workloads - Adv. 3q (LHS)

Total Construction Output (RHS)

Net balance %

Source: RICS, ONS

Annual % change (value)*RICS Total Workloads and Construction Output

*Four quarter sum

Construction Sector - A year of modest growth ahead



Material input cost growth remains subdued due to falling global commodity prices.

Surveyors in all parts of the UK expect workloads and employment to continue rising over the coming year.

But labour input costs are rising rapidly as demand for workers significantly outstrips supply.

Profit margins look set to continue rising due to strong demand for construction and continued weakness in commodity prices.

Construction Sector

-20

-15

-10

-5

0

5

10

-80

-60

-40

-20

0

20

40

60

2001 2003 2005 2007 2009 2011 2013 2015

RICS 12 month Expectations for ProfitMargins (Adv. 2 quarters - LHS)

BCIS Tender Price divided by BCIS BuildingCost Index (RHS)

Source: BCIS, RICS

Net balance, % Annual % changeProfit Margins and Expectations for Growth

0

1

2

3

4

5

Great Britain Lon/SouthEast

SW & W Mid/EA North (NE,NW, YH)

Scot NI

Workloads (levels)

Employment (levels)

Annual % change

Surveyor Expectations - 12 months ahead

Source: RICS

-6

-4

-2

0

2

4

6

8

10

12

-60

-40

-20

0

20

40

60

80

100

2007 2008 2009 2010 2011 2012 2013 2014 2015

Industial Materials Index (LHS)

BIS All Work Price Index (RHS)

Annual % change Annual % change

Source: IMF, BIS

Building Material Costs

-2

0

2

4

6

8

2007 2009 2011 2013 2015

Earnings Growth*

ConstructionWhole Economy

*3m average annual change Source:Macrobond

Annual % change



-20

-15

-10

-5

0

5

10

15

2007 2009 2011 2013 2015

HalifaxNationwideONSLand Registry

Annual % change

Sources: ONS, Halifax, Nationwide, Land Registry

House Prices*

* based on the average of the last three months against the same three months a year ago

-15

-10

-5

0

5

10

15

-100

-80

-60

-40

-20

0

20

40

60

2007 2009 2011 2013 2015

RICS Price Balance (Adv. 2 quarters - LHS)

ONS House Price Index - (RHS)

RICS Price Balance and ONS House Price Index

Net balance, %

Source: RICS, ONS

Annual % change

70

80

90

100

110

120

2007 2009 2011 2013 2015

Index Jan '07=100

Real and Nominal House Prices

Average Nominal House Price*

Real House Price(CPI adjusted)

Source:Macrobond*Average of Halifax and Nationwide

Main house price indices finished the year showing growth of between 4.5% and 10%.

RICS lead indicators point to sustained growth through mid-2016.

But in real terms, house prices remain significantly below their pre-crisis peaks.

Prices are rising across all parts of the UK with East Anglia and Northern Ireland seeing particularly strong growth.

Housing Market - Stamp duty change increases BTL demand

0

0.5

1

1.5

2

2.5

3

3.5

0

10

20

30

40

50

60

70

80

90

Lon SE EA Wal SW Y&H N NW WM EM SCOT NI

RICS Price Balance (LHS)

ONS House Prices (RHS)

Net balance* %

RICS Buyer Enquiries and New Instructions

Source: RICS, ONS*three month average

3M/3M % change



-80

-40

0

40

80

-40

-20

0

20

40

60

80

2005 2007 2009 2011 2013 2015

RICS Sales Expectations - adv. 6 months - (LHS)

Land Registry Sales - (RHS)

Source: RICS, Land Registry

Net balance, % Annual % changeRICS Sales Expectations and Land Registry Sales

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

-80

-60

-40

-20

0

20

40

60

80

2006 2008 2010 2012 2014 2016

RICS London Rent Expectations - Adv 5q. (LHS)London Index of Private Rents (RHS)

Net balance % Annual % change

Source: RICS, ONS

RICS London Rent Expectations and ONS Private Rents

-25

-20

-15

-10

-5

0

5

10

15

20

25

-150

-120

-90

-60

-30

0

30

60

90

2008 2010 2012 2014 2016

RICS Price Expectations minus Rent Expectations- 3 month average adv. 9 months (LHS)

Price Rent Ratio (RHS)

RICS Expectations and London House Price to Rent Ratio

Net balance, % Annual % change

Source: RICS, ONS

Transaction activity is increasing and respondents to the December RICS Residential Market Survey expect a boost in sales in the near term.

London is seeing the strongest rental growth of any UK region and rents will continue to rise over the coming year.

Lenders report a rise in demand from buy-to-let investors in Q4 2015 and they expect to increase credit to the sector ahead of a new stamp duty surcharge on BTL and second home buyers starting April.

But price growth has begun to accelerate and is likely to outpace rental growth in London in 2016.

Housing Market

-80

-60

-40

-20

0

20

40

60

-40

-30

-20

-10

0

10

20

30

2008 2009 2010 2011 2012 2013 2014 2015 2016

BoE CCS Demand for BTLlending - next 3 months (LHS)

CML BTL Loans (RHS)

Net balance, % Annual % change (4 quarter sum)

Source: BoE, CML

Expected Buy-to-Let Demand and Mortgage Approvals



-3

-2

-1

0

1

2

3

4

-80

-60

-40

-20

0

20

40

60

2001 2003 2005 2007 2009 2011 2013 2015

RICS Occupier Sentiment Index(Adv. 1 year - LHS)Employee jobs (RHS)

Occupier Sentiment and Employment Growth

Source: RICS, ONS

Net balance, % Annual % change

4

5

5

6

6

7

7

8

8

9

90

5,000

10,000

15,000

20,000

25,000

2000.Q1 2002.Q1 2004.Q1 2006.Q1 2008.Q1 2010.Q1 2012.Q1 2014.Q1

Total transactions (LHS)

Yield (RHS)

Value £m

Investment Transactions and Yield

Source: IVBL

% (inverted)

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

-100

-80

-60

-40

-20

0

20

40

60

2001 2003 2005 2007 2009 2011 2013 2015

RICS Rent Expectations - Adv. 3q (LHS)

CBRE Rental Index (RHS)


Source: RICS, CBRE

RICS Rent Expectations and CBRE Rental Growth

0

1

2

3

4

5

6

Prime Office SecondaryOffice

PrimeIndustrial

SecondaryIndustrial

Prime Retail SecondaryRetail

Average

Q3 2015Q4 2015

Source: RICS

Annual % change RICS Members' Twelve Month Rental Expectations

Surveyors expect the prime office and industrial sectors to see the strongest rental growth in 2016.

Rents are expected to continue rising in the coming quarters following growth of 4% in 2015.

Flows of investment into UK commercial real estate decreased in the latter half of 2015.

Commercial Property Sector - Conditions remain firmOccupier sentiment continues to improve as the UK labour market ends the year on a strong note.



-40

-30

-20

-10

0

10

20

30

-100

-80

-60

-40

-20

0

20

40

60

80

100

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

RICS Investment Enquiries - Adv. 2q (LHS)

CBRE Capital Value Index


RICS Capital Value Expectations and CBRE Capital Values

Source: RICS, CBRE

0

10

20

30

40

50

60

70

Very Cheap Cheap Fair Value Expensive Very Expensive

UK (ex London)

Central London

% of respondents

Source: RICS

Surveyors Opinions on Capital Values

Yields look to be finding a floor, having reached an eight year low in Q4.

There has been a fall off in investment from foreign buyers but they are still the major players in the market, purchasing more property than all other investors combined.

Capital value growth has begun to moderate and should continue to do so over the coming two quarters.

Prices in the central London market are looking increasingly stretched with 80% of surveyors reporting them to be above fair value relative to fundamentals.

Commercial Property Sector

0

5

10

15

20

25

30

35

0.6

0.8

1

1.2

1.4

1.6

1.8

2002 2004 2006 2008 2010 2012 2014 2016

IFO economic situation next 6 months- UK relative to World (LHS)

IVBL foreign purchasers (RHS)

IFO Economic Outlook and Foreign Commercial Property Investment

Ratio (UK/World Index) £bn (four quarter sum)

Source: IFO, IVBL

5.0

5.5

6.0

6.5

7.0

7.5

8.0-80

-60

-40

-20

0

20

40

60

2008 2009 2010 2011 2012 2013 2014 2015

RICS Investment Sentiment Index (Adv. 2 qrts - LHS)*

IVBL All Property Yield (RHS)

Source: RICS, IVBL

RICS Expectations and IVBL All Property YieldNet balance % % (Inverted axis)

© RICS Economics 2016 February 2016


13

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• Canada Construction Market Survey (quarterly)

www.rics.org/constructionmarketsurvey

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Michael Hanley, Economist [email protected], +44 (0)20 7695 1684

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Documents

RICS UK Economy and Property Market Chart Book - February 2016 (1)