Quintet event on the real estate
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Economic forecasts for 2024 can vary widely depending on what indicators one considers. Optimists say central banks’ openness to cutting interest rates means happier days are coming. Others point to the risk of recession and renewed inflation. At a recent Quintet Luxembourg Private Bank event, housing sector representatives seemed to put a lot of hope into things very much going their way.

Those who make money in Luxembourg’s real estate sector are still in shock after the arrival in this country of the long-ago predicted 2023 global real estate correction. Property prices declined 13.6% on an annual basis in the third quarter of 2023. Real estate employees were being laid off after decades of high profits. Promotors could be forgiven for trying to put on an optimistic face.

“The country’s property sector appears poised for recovery in 2024,” said a Quintet press release citing Nicolas Sopel, head of macro-research and chief strategist, Luxembourg, “following European Central Bank interest rate cuts that are expected around mid-year.”

Supporting real estate

The release goes on to say “the sector should be further supported by gradually easing financial conditions and a broader macroeconomic recovery.”

“That looks optimistic based on the data I have,” said Benjamin Holcblat, a University of Luxembourg researcher focusing on data science, econometrics and asset pricing.

People who hold this sort of view, he said, believe that relatively good US growth pulls Europe in its wake. He argues that the Ukraine war has disrupted any synchronisation of the US and European economies. While the US has been doing relatively well, “I’m much more pessimistic about Europe because the driver of the European economy, Germany, is not doing well at all.”

Not such a good idea

The International Monetary Fund, meanwhile, has warned that Europe, too, is in trouble when it comes to commercial real estate.

“I think looking at the US to have a hunch about what’s going on to Europe, I think it’s not a good idea anymore,” Holcblat added.

“When they talk about a broader macroeconomic recovery, I would say a macroeconomic stabilisation, but probably not a recovery,” he said. “I think the situation will not remain as bad. We are going to go something more stable, but we are not going back to the equilibrium that was before the war, as long as we do not manage to find the replacements for Russian energy.”

“Inflation is probably not going to be as bad as at the beginning of a war,” Holcblat said. “But it’s far from being over. The mandate of the ECB is 2%. The probability that they get that 2% is very, very small.”

Recessionary odds

Holcblat is not alone in downplaying the ‘Goldilocks’ scenario. At a recent Banque de Luxembourg Investments investor event, chief investment officer Guy Wagner listed various economic indicators and historical parallels that would raise the odds of a recession. He compared recent history to the period between 1966 and 1983. During that time, a first inflationary wave led to rate hikes, cut soon because of illusory positive indicators, only to have a second inflationary wave lead to renewed rate hikes.

Sopel at Quintet pointed to a rebound in listed property markets following the correction. However, even he injected a note of caution leavened by optimism. “Physical properties may continue to face downward pressure in the short term,” said Sopel, “but expected lower interest rates should ease financial constraints and prove a tailwind for the sector.”

While Holcblat made it clear that he doesn’t foresee a collapse in Luxembourg property for structural reasons of lack of supply and steady demand, he sees no return to the pre-2023 situation. “I don’t see the ECB dramatically cutting the rates, so I think the cost is going to stay the same, raw materials are going probably to go down a bit, but not that much.”

Cost of building

“It’s difficult to have poor macroeconomic conditions and a real estate sector that is booming at the same time,” he explained.

High raw materials and energy costs raise the cost of building, Holcblat pointed out. He explained that has led the Luxembourg government to finally intervene with a stimulus package for the housing sector.

The University of Luxembourg researcher, somewhat heretically given economic orthodoxy, questioned the effectiveness of the rate cuts in controlling inflation.

“It’s not clear to which extent like increasing rates was the right reaction because it’s exogenous shocks, the economy was not necessarily overheating,” he said. “when you increase the rate essentially, it’s because you want to make borrowing more expensive and cool down the economy. It’s not clear that it was the optimal answer.”

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