New inflation dynamics are a game changer for real estate

The new wave of inflation dynamics we are facing is a game changer with implications for the real estate sector as well, said Sandra Phlippen, Chief Economist, ABN AMRO Bank.

It all started in the US with inflation re-awakening and a spiral between price increases and wage increases that keeps reinforcing itself and creating a lot of turbulence giving the Fed no choice but to keep raising interest rates, she told Real Asset Insight’s Richard Betts.

In Europe the situation is different, she said: “Most of the inflation is still energy-driven, broadening out a little bit but not to the extent that we’ve seen in the US. The issue is that the ECB still feels the need to hike and will probably do that in July and then again in September and possibly in December, but it is much less aggressive than in the US”.

But there is a counter-force at work in Europe, because the combination of high prices and low wage growth means that people’s wages are going backwards so they have less to spend, which will lead to a slowdowng in growth.

“I believe that by the end of this year growth will have slowed down so much that the ECB will no longer have room to raise interest rates”, she said. “We cannot enter a recession and have the ECB hiking, so real estate investors should realise that interest rates are a worry in the short term but they should focus on the long-term”.

The biggest challenge is decarbonisation and that’s what everyone should concentrate on right now because there’s very little time left to act, Phlippen pointed out. Governments should step in with subsidies and incentives to use renewable alternatives, while real estate investors should definitely not stop investing but should be looking for opportunities.

“In the end Europe is going to end up as a dark green island”, she said. “So if you want to be successful in Europe don’t freeze your investment agenda just because of rate hikes that will probably stop before the end of the year”.

Click on the video to watch the full interview or listen to the podcast below.