The Unassuming Economist

From the Global Housing Watch Newsletter: October 2015

The heady days of boom in house prices around the world remain elusive. The current state is a mix of gloom and boom. On house price performance at the global level, Knight Frank says that its Global House Price Index recorded its weakest growth in four years. On the performance in advanced vs. emerging market economies, “Real residential property prices continued to increase significantly in most advanced economies in the first quarter of 2015, rising by 3.6% year on year (…) Turning to emerging market economies, real prices decreased by 0.4% year on year”, says the Bank for International Settlements. On country specific performance, Savills says that “There are four ways that the global real estate markets have behaved since 1985 (…): boom-busters [Denmark, France, Ireland, Italy, Netherlands, and Spain], the stabilisers [Belgium, Finland, United Kingdom, and the United States], deflators [Germany, Japan, and Switzerland], and the high-risers [Australia, Canada, New Zealand, Norway, and Sweden]. 

On countries where house prices are booming, the Economist notes that “Taking an average of our two measures [price-to-income and price-to-rent], houses are more than 30% overvalued in six markets [Australia, Belgium, Canada, Hong Kong, Sweden, and United Kingdom].” Meanwhile, Scotiabank points out that “The persistence of historically low interest rates is highly supportive of global housing demand. However, heightened economic uncertainty and still soft job markets remain a headwind to a stronger housing outlook in many nations. Among the more robust housing markets globally, including Canada, Australia, the U.K. and Ireland, stretched affordability could pose an increasing challenge.” All of these developments are happening against a background where the IMF “foresees lower global growth compared to last year, with modest pickup in advanced economies and a slowing in emerging markets, primarily reflecting weakness in some large emerging economies and oil-exporting countries.”

House price developments by region

Africa & Middle East and Central Asia: “South Africa’s housing market is slowing, with the price index for medium-sized apartments rising by a meagre 0.6% during the year to Q2 2015”, notes Global Property Guide. In Nairobi “a building boom is starting (…) Property prices have increased almost fourfold since the early 2000s”, says the Economist. Meanwhile, “Dubai’s residential property prices plunged 11.72% during the year to Q2 2015, the second consecutive quarter of house price falls (…)”, notes Global Property Guide. “The potential of this region for real estate investment is vast given the size of population and rate of urbanisation and economic development. The main barrier will continue to be fear of geo-political issues and conflict (…)”, according to Savills.

Asia and the Pacific: “Asia goes two ways – half of Asia is strong. [while the other half continues to lose steam] (…) Prices continue to fall in five [China, Indonesia, Singapore, Taiwan, and Vietnam] of the ten Asian markets”, according to Global Property Guide. Moreover, “In a bid to limit house price growth, Asia Pacific stands out among global real estate markets as being particularly regulated. Price cooling measures in the form of stamp duty hikes and taxation has had the effect of reducing transaction levels in the prime markets, most notably in Hong Kong and Singapore. Prospects for future growth in the region will be significantly driven by China’s economy, which is currently slowing but likely to receive further stimulus and whose population will be a significant and growing market force for decades to come.”, writes Savills. A new IMF study finds that in Australia “(…) house prices are moderately stronger than consistent with current economic fundamentals, but less than a comparison to historical or international averages would suggest.” In New Zealand, “The resurgence in Auckland house prices over the past year has made the Reserve Bank increasingly concerned about the risks to financial stability. It is certainly on our ‘what keeps us awake at night’ list”,–said Grant Spencer (Deputy Governor) in a speech on Investors adding to Auckland Housing Market Risk. Finally, PropTiger takes a look at where India stands in Asia’s real estate market.

Europe: “Europe is no longer the weakest-performing world region, a title it has held for 15 consecutive quarters”, declares Knight Frank. The latest numbers from Eurostat shows that in the second quarter of 2015 “House prices (…) rose by 1.1% in the euro area and by 2.3% in the EU” compared to a year ago. However, the European Central Bank finds “that the recovery in house prices in the euro area has been rather muted thus far and appears to be weaker than the typical increase observed historically (…). At the same time, corrections of previous overvaluations, together with favorable income and financing conditions, suggest that the current recovery has a better chance of being sustained than the short-lived upturn observed relatively soon after the crisis. (…) the accompanying credit dynamics have thus far remained muted, limiting the build-up of systemic risks to the euro area financial system. The new macroprudential toolkit is also helping to mitigate possible risks in a targeted and granular way.” On other housing market indicators, “Housing supply (…) remained at the same level, with the exception of the number of building permits which increased in 2014. The rate of mortgage lending returned to growth in 2014, thus reversing the declining trend that began following the housing boom in the EU. Total outstanding lending in the EU increased”, according to the European Mortgage Federation.

In the Nordic countries, Roubini Global Economics points out that house prices continue to rise as well as household debt. It also says that “Given the dangerous links between house prices, household debt and bank credit, shocks deriving from higher interest rates, lower house prices and lower disposable income could generate GDP losses of more than 1% over a five-year period. This vulnerability highlights the need the Nordics to make use of risk-management measures (…) However, governments are reluctant to adopt these for fear of upsetting electorates that are already tilting toward anti-system parties.” Moreover, the Central Bank of Denmark says that “In the Copenhagen area, where house prices have risen considerably in recent years, housing taxes have not increased correspondingly. Relative to the property values, homeowners are currently paying substantially less in Copenhagen than in other parts of Denmark, where price increases have been more moderate. (…) there is a risk that price increases have become self-reinforcing, meaning that they are very much determined by expectations of even higher prices in the future.”

Western Hemisphere: “The U.S. housing recovery is gaining traction (…) Canadian home sales and pricing are proving resilient (…) Mexico’s fledgling housing recovery is supported by wide-reaching market reforms aimed at spurring new residential development and broadening access to mortgage lending. Elsewhere in the Americas, property markets in Chile, Colombia and Peru are showing positive but more muted momentum, consistent with a softening in regional growth dynamics. Housing conditions continue to deteriorate in Brazil, with a prolonged recession and rising unemployment compounded by high interest rates and rising inflation”, according to Scotiabank. Brazil is at the end of a cycle (…) In real terms house prices fell 3.65% (…) Average price growth has been slowing down from 18.7% in 2012, 12.3% in 2013, down to 10.2% in 2014”, notes Global Property Guide. Meanwhile, “Costa Rica´s higher-end property market continues to grow rapidly as foreign homebuyers flock in” (Global Property Guide).

Other related developments

From the Global Housing Watch Newsletter: September 2015

On the mortgage market: “There is still some distance to go for FHA [Federal Housing Administration] to provide certainty to mortgage lenders. Until this is achieved, lenders will continue to impose overlays when making FHA mortgages. This puts the lower-end of the housing market at a disadvantage because of its heavy reliance on FHA mortgages.” Also, it was noted that “Despite the advent of new technologies, including automated underwriting systems and automated appraisal tools, the time required to close a mortgage remains around 45 days, close to the time required during the 1990s.”

On how technology can change the housing and mortgage markets? “Compared to many other industries, housing and mortgage markets have lagged in their adoption of technology. More recently, real estate brokers have been using online search data to predict house price and home sales movements.” However, more could be done. For example, “Embracing e-Mortgage technology could potentially shorten closing timelines and reduce costs.”

On policy: “Housing policy needs to adapt to the new economy. Traditional ways of underwriting mortgages need to be changed to adapt to the evolving economy. For example, new FICO score formulas that reduce the weight of medical debt need to be incorporated. Income of borrowers such as Uber drivers needs to be underwritten properly. An inability to adjust to the changing economy can result in an inadvertent tightening of mortgage lending.”