The summit between Brazil, Russia, India and China (the BRICs) in the Siberian city of Yekaterinberg Tuesday marked the first such official meeting of a group largely confined until now to the pages of economic analysis and sideline meetings at G20 gatherings. Signals from BRIC members suggesting they want to reduce their dollar assets and increase the use of domestic currencies in international trade have attracted much media attention and added to pressure on the dollar. However, the inaugural summit focused primarily on forging common positions on financial regulatory reform and climate change rather than foreign exchange rate management. However, this meeting, as with the meeting of the Shanghai Cooperation Organization on June 15 also in Russia, remains more political than economic. While the contribution of these economies to global growth is set to increase over the next decade, their different interests suggest that forging common positions may be difficult.
Today we take a look at the health of residential and commercial property markets around the world. Slowing economic activity and a credit crunch contributed to a decline in housing activity, prices and construction in most major economies. Eastern Europe and the Baltics, as well as the U.S. and UK, have endured some of the sharpest declines. In many countries, not only in the U.S., the bottom of the property markets still seems far off, with sales, prices and starts forecast to continue declining, albeit at a slower pace, through much of 2009.
In fact, many European economies (and Canada) tend to have housing cycles that lag behind the U.S. by about 2-3 years, suggesting that their declines could also persist beyond a U.S. housing stabilization. Sounder lending standards and lower incentives to invest in residential property in some countries may allow them to avoid the depths of the U.S. property correction but others may suffer more severely. The liquidity resulting from quantitative easing has contributed to a slower deterioration of the housing markets. Yet with high inventories in many markets, it may take some time to absorb the excess. This will continue to erode the value of asset-backed securities and banks’ balance sheets and defer the revival of construction activity, a major driver of growth.
The decline in retail trade and contraction of the financial sector has worsened the commercial property outlook. Commercial vacancy rates are on the rise in almost all major centers in Europe and North America and net effective rates have declined by 25-30% in major cities in Asia, suggesting that new investment is unlikely as these cities try to absorb overcapacity in retail and hotel trade. Meanwhile, still tight corporate debt markets pose obstacles for corporate finance. Despite the weak fundamentals, REITs and other property investments have benefited from the renewed risk appetite and have been climbing off late. These property investments might well be vulnerable to any reversal of risk appetite.