Inflation May Cut Property Returns, Retail Sales Rise, Applications Drop as Mortgage Rates Top 6%
Inflation May Cut Property Returns
Lingering inflation could worsen what some analysts already view as a dour outlook for global real estate investment returns over the next two years, according to forecasting firm Oxford Economics.
The U.K.-based firm said Sept. 15 that its “baseline scenario” for commercial and residential real estate calls for annual returns to average 5.2% for 2022-2024. That’s 2.2% below the company’s June forecast for the same time.
“However, if inflation were to become embedded, as is the case in our high-inflation regime scenario, this would knock returns to 2.1% annually,” Oxford Economics researchers said in a statement. For all scenarios, from low to high risk, the average expected annual return is 4.4%.
“The greatest risk to near- and long-term property returns is a scenario where inflation remains elevated and central banks lose their credibility in controlling it,” the statement said.
Prior to this year’s wave of high inflation and rising interest rates, Oxford Economics in late 2021 forecast 8% growth in global real estate returns for 2022. Returns in several property categories have bounced back since 2020, when overall returns came in at approximately 5%, down from 7% in 2019, the firm reported.
Retail Sales Rise
U.S. retail and food service sales rose 0.3% from the previous month and 9.3% from a year earlier for the month of August, which some analysts read as consumer strength in the face of rising costs and volatile stock markets.
“Household spending remains steady even as costs continue to rise,” Jack Kleinhenz, chief economist for the National Retail Federation trade group, said in a statement regarding the latest Commerce Department numbers. “Consumers continuing to spend more each month points to the benefits of strong job and wage growth and their use of pandemic savings to help handle persistent elevated prices.”
Kleinhenz cautioned consumers have “limited options” and cannot continue spending if prices do not begin to soften soon. “This retail sales report comes amid mixed signals from the broader economy that show the headwinds against the consumer are strengthening,” he said.
The Commerce Department’s Sept. 15 report showed consumers spending a total of $683.3 billion in U.S. stores, restaurants and service businesses during August. Spending at gas stations was up 29.3% from August 2021, leading all retail categories for percentage increases as fuel prices remained historically high while declining in recent weeks.
Other categories with sizable year-over-year gains in August included food service and drinking places at 10.9%, building material and supplies dealers at 10.5%, motor vehicle and parts dealers at 6.7%, and sporting goods and hobby stores at 5.5%.
Applications Drop as Mortgage Rates Top 6%
A decline in mortgage applications in the early weeks of September was just the latest sign of a housing market slowdown created by factors including rising interest rates, which topped 6% for the first time since late 2008.
“Mortgage rates continued to rise alongside hotter-than-expected inflation numbers this week,” Sam Khater, chief economist at government-sponsored lending agency Freddie Mac, said in a statement Sept. 15.
Freddie Mac’s latest weekly national survey of lenders showed 30-year, fixed-rate mortgages averaging 6.02% as of Sept. 15, up from 5.89% a week earlier and 2.86% in the comparable week of 2021. The rate for 15-year, fixed-rate loans averaged 5.21%, compared with 5.16% a week earlier and 2.12% a year earlier.
“Although the increase in rates will continue to dampen demand and put downward pressure on home prices, inventory remains inadequate,” Khater said. “This indicates that while home price declines will likely continue, they should not be large.”
The Mortgage Bankers Association trade group reported mortgage applications for the week ended Sept. 9 were down 1.2% from the prior week. The volume of refinance applications was down 4% for the week and declined 83% from the comparable week of 2021, with purchase applications up 0.2% for the week but down 29% from a year earlier.