The economic scenario always ranks as a major consideration when buying real estate. Whether at global, national or local level, GDP growth, inflation, interest rates and employment figures are all prime factors in the decision. In this article, we look at what will be important for property investment in 2023.
Economic growth in 2023
By mid-2022, economic growth slowed almost globally. As a result, by the end of the year, some countries had already entered a technical recession. As a result, analysts have reduced their predictions for 2023.
The IMF, for example, forecasts 1.8% GDP growth at global level in 2023, with 3% in 2024. However, for some areas, including the Eurozone, UK and US, it predicts negative figures this year.
Nevertheless, Knight Frank reports that “the downturn will be mild by historic standards”. The company’s Five Economic Indicators for Housing Markets believe this scenario will be an opportunity for an economic reset.
Inflation rates in 2023
The rising cost of living is a principal factor in property investment in 2023, particularly as rampant inflation was the poster child in many economies last year. In 2022, myriad countries experiencing double-digit price rises in the summer. As Knight Frank points out, “the path of inflation will continue to determine the course for interest rates”. The results will therefore “reverberate through global asset prices”.
However, some countries have already successfully curtailed the trend – Brazil is one example, ending the year with inflation of 5.79%. Central Banks’ efforts to bring inflation down appear to be working. Consequently, peak inflation could well be “in the rear-view mirror”.
Interest rates in 2023
The rising cost of borrowing money went hand-in-hand with high inflation throughout 2022, a year when Central Banks worldwide pushed their rates up. For example, the US Federal Reserve raised its rate by 425bps, the third-highest rate on record. For their part, the Bank of England and European Central Bank increased rates by 3.5% and 2.5%, respectively.
Smaller hikes this year
The Knight Frank report forecasts smaller rate increases this year. Analysts believe the peak will come in the first six months of 2023. Expected rates are 5% in the US, 4.5% in the UK and 3% in the Eurozone.
For cash property investment in 2023, higher rates represent a minor problem. However, for investors dependent on loans, mortgage rates will continue to be a factor to bear in mind throughout the year.
Unemployment in 2023
The local or regional job market is a prime consideration, particularly for buy-to-let property investment. In 2023, Knight Frank reports that many countries have “a relatively strong employment market” and as a result, analysts do not expect “a dramatic rise” in the jobless rate.
A slight rise in unemployment combined with pent-up household savings leads Knight Frank to believe that an economic downturn “could be shorter and shallower than previous cycles”. The result would be positive for residential markets and, by extension, for property investment in 2023.
Currency exchange in 2023
If you’re buying in another currency, fluctuations in the exchange rate play a major role in your investment. The US dollar has performed particularly well over the last few years. By November 2022, it had gained over 10% against a range of currencies in the year.
Knight Frank reports that only the Brazilian real and the Russian ruble strengthened after the dollar in 2022. However, the dollar has since started to lose ground, a trend that could continue this year.
On the other hand, the Japanese yen and pound sterling have both gained on the US dollar. Nevertheless, the pound remains well below its exchange rate against the dollar at the beginning of 2022.
(Source: Knight Frank)