…According to the IMF – Global Financial Stability Report prices continue to rise in most regions of the world, spurred on by historically low interest rates and generally benign credit conditions
…A recent article from the IMF – Assessing the Risk of the Next Housing Bust …concludes that:
- …in most advanced economies in our sample, weighted by GDP, the odds of a big drop in inflation-adjusted house prices were lower at the end of 2017 than 10 years earlier but remained above the historical average.
- In emerging markets, by contrast, riskiness was higher in 2017 than on the eve of the global financial crisis.
- Nonetheless, downside risks to house prices remain elevated in more than 25% of these advanced economies and reached nearly 40% in emerging markets in our study.
The January 2019 IMF – Global Housing Watch presents the situation as at Q2 and Q3 2018: –
Source: IMF, BIS, Federal Reserve, ECB, Savills, Sinyl, National Data
…Then the IMF compare house prices to average income: –
Source: IMF, OECD
…Finally the authors assess House Price/Rent ratios:
Source: IMF, OECD
…[The above] one year snap-shot disguises some lower term trends. The following chart from the September 2018 UBS Global Real Estate Bubble Index puts the housing market into long-run perspective.
UBS go on to rank most expensive cities for residential real estate, pointing out that top end housing prices declined in half of the list:
…The chart below shows the one year change (light grey bar) and the five year change (dark grey line):
The U.S. market is generally robust. According to Peter Coy of Bloomberg – America Isn’t Building Enough New Housing the effect of the housing collapse during the financial crisis still lingers, added to which zoning rules are exacerbating an already small pool of construction-ready lots. Non-credit factors are also corroborated by a recent Fannie Mae survey of housing lenders which found only 1% blaming tight credit, whilst 48% pointed to lack of supply.
In Canada, the outlook has become less favourable, partly due to official intervention which began in 2017. Since 2012, house price increases in Toronto accelerated away from other cities, Vancouver followed with a late rush after 2015 and price increases only stalled in the last year.
In their February 2019 report Moody Analytics – 2019 Canada Housing Market Outlook: Slower, Steadier – identify the risks as follows:
- Interventions by the BoC, OSFI, and the British Columbia and Ontario governments were by no means a capricious attempt to deflate a house price bubble for the mere sake of deflation.
- Financial and macroeconomic aggregates point to the possibility that the mortgage credit needed to sustain house price appreciation may be unsustainable. Since 2002, the ratio of mortgage debt service payments to disposable income has gone from a historical low point of little more than 5% in 2003 to almost 6.6% by the end of last year…
The authors go on to highlight:
- the danger of the overall debt burden, should interest rates rise, or should the Canadian economy slow, as it is expected to do next year.
- They expect the ratio of household interest payments to disposable income to rise and the percentage of mortgage arrears to follow a similar trajectory. In reality, the rate of arrears is still forecast to reach only 0.3%, significantly below its historical average.
External factors could create the conditions for a protracted slump in Canadian real estate. Moody’s point to:
- a Chinese real estate crash,
- a no-deal Brexit,
- renewed austerity in Europe
- and a continuation of the US/China trade dispute
as potential catalysts. In this scenario 4% of mortgages would be in arrears. For the present, however, Canadian housing prices remain robust…
Australian residential housing prices, especially in the major cities, have suffered from this downdraft. According to a report, released earlier this month by Core Logic – Falling Property Values Drags Household Wealth Lower, the decline in prices, the worst in more than two decades, is beginning to bite. According to the ABS (Australian Bureau of Statistics),
- …Total household assets have fallen in value over both the September and December 2018 quarters taking household wealth 1.6% lower relative to June 2018. While…liabilities have increased by 1.5% over the same period.
- As a result of falling assets and rising liabilities, household net worth…[fell to] the lowest it has been since September 2017…
- As at December 2018, household debt was 189.6% of disposable income, a record high and up from 188.7% the previous quarter.
- Housing debt was also a record high 140.2% of disposable income and had risen from 139.5% the previous quarter.
- In 2018 the Australian Residential Property Price Index fell 5.1% [due to]…tightening credit conditions and reduced demand from investors and owner occupiers.
- Sydney, down 7.8%
- Melbourne, off 6.4%,
- Darwin, down 3.5%
- and Perth, which has been in decline since 2015, shed a further 2.5%.
According to many commentators, Australian property has been ready to crash since the bursting of the tech bubble but, as this chart shows, prices are rich but not excessive:
Source: AMP Capital
Aside from some corrections in certain cities (notably Vancouver, Toronto, Sydney and Melbourne) prices continue to rise in most regions of the world, spurred on by historically low interest rates and generally benign credit conditions. [That being said,] the greatest macroeconomic risk to global housing markets stems from a tightening of financial conditions. Central banks appear determined to lean against the headwinds of a recession. In the long run they may fail but in the near-term the global housing market still looks unlikely to implode.