Fast-rising property hotspots across the globe spur easy-money bubble fears

From China to Canada and London, fast-rising property markets are haunting the global economy again, five years after the US subprime mortgage bubble burst and triggered the worst financial crisis since the 1930s.

For now, house price inflation is neither as high nor as widespread as it was in the middle of the last decade.

Except in a few cases, the warning signals are flashing amber, not red, and several countries have acted to cool overheating markets.

But the confidence of policy makers that they can avoid another generalised boom and bust could be tested if central banks keep pumping out nearly free money to support economic growth by encouraging investment in riskier assets such as property and equities.

Plentiful cheap credit is just one more inducement to home buyers who, in many countries, can deduct mortgage interest from their income or are exempt from capital gains tax when they sell their house, said Andrew Oswald, professor of economics at Warwick University, Coventry.

“We’re stoking up a huge bubble,” he said. “It’s quite extraordinary. We virtually ruined the Western world by having high house price inflation and now we’re determined to do it again.”

On the face of it, the re-acceleration in US house prices spells trouble.

According to the National Association of Realtors, the national median home value at the height of the bubble, in Jul 2006, was $230,400 (€170,800). In Jul 2011, the median price was 25.7% below that peak. By July this year, it had climbed back to within 7.3% of the high water mark.

Yet some of the engines of the price recovery are spluttering. Most importantly, mortgage rates have risen as markets anticipate an end to the Federal Reserve’s bond buying.

Robert Shiller, co-creator of the S&P/ Case-Shiller Home Price Index, said higher borrowing costs could limit US house price gains in 2014 to roughly 6%. The index rose 12.8% in the year to August.

“The US market might be cooling,” Shiller said. “I think prices will keep going up for a while. There is still momentum, but it may fade and turn down in the next year or two.”

Higher interest rates are also causing cash buyers to pull back.

According to Goldman Sachs, in 2012 and the first half of 2013 fully 60% of home purchases were all-cash transactions — double the pre-crash figure — as Wall St and foreign investors swooped in on distressed markets.

Family buyers are taking up some of the slack. But the speculative frenzy that marked the go-go years of the mid-2000s is missing.

Banks have tightened mortgage standards, while the jobless rate is a lofty 7.2% and wages are stagnant. In Las Vegas, prices have rebounded 29.2% in the past year, but Gregory Smith, a local estate agent, said the market was now cooling off.

“More families are starting to get their offers accepted, as the investors retreat. These are real buyers who intend to stay in the homes long-term. We are in a flattening-out phase.”

To assess property market risk, house prices need to be gauged in relation to income.

Whereas the US price-to-income ratio at the end of 2012 stood at 84.3, measured against a rolling long-run average of 100, the ratio in Canada was at a 10-year high of 131.7, according to the Organisation for Economic Cooperation and Development.

Supply constraints — notably strict planning rules — are also contributing to surging prices in London, where high-end property has been in demand from foreign investors.

Richard Donnell, research director at property analysts Hometrack, said it was tough to set a rational price benchmark for London given the differing motives of foreign buyers.

Prices in the capital rose 9.4% in the year to September, according to Land Registry data.

“At the moment it looks like prices are going to keep on going up. But it’s impossible to know what will change sentiment,” Donnell said.

The British government has launched subsidised mortgage schemes to galvanise housing ahead of an election in 2015 but Donnell said there was no nationwide bubble.

The picture in Europe is one of stark divergences.

The IMF has expressed concern about high prices in Norway and the Bundesbank grabbed headlines by warning that apartments in Germany’s biggest cities could be overvalued by as much as 20%. In Ireland, Spain, and Denmark, by contrast, price-to-income ratios have slumped since the peak in 2006/2007.

Generalising about a global asset class when conditions vary from country to country is treacherous.

In Japan, the cost of residential land — a proxy for property prices — is still 50% below its 1991 peak but new apartments in Tokyo are selling briskly.

At Skyz Tower & Garden, an apartment building near the site of the athletes’ village for the 2020 summer Olympics, the first 820 units went on sale in August and are almost sold out.

For advanced countries as a group, house prices were now ‘appropriate’ considering historically low mortgage rates, according to ABN Amro, a Dutch bank.

“We are getting to a new phase where regular, middle- class families can purchase again,” said Madeline Schnapp, an economist with “But unless jobs get moving and incomes begin to rise I don’t think we are in danger of any sort of bubble.”

— Reuters


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