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The biggest development over the past year in the global housing market has been some price moderation in the top performing countries, which are now the most expensive markets. It is encouraging that these adjustments are mostly due to macroprudential policy measures implemented over the past couple of years, as well as larger supply availability, rather than catalysts such as a sudden drop in demand due to monetary policy overtightening.
In many cases, recent housing market dynamics have been dominated by supply-side restrictions, restrictions on foreign purchases, tax policy changes and stricter lending standards, rather than just by demand weakness.
Some countries vulnerable to downturns
The housing market is one of the key transmission mechanisms between the financial system and the real economy. With such large excesses in housing markets, some countries are vulnerable to significant downturns which might result from an unrelated domestic or external shock, and would be amplified through housing. But in most cases the housing boom tends to be limited to one or a few cities, which could potentially contain the damage.
Over the past year, global house prices have continued rising, and are now marginally above the pre-crisis levels in real terms.
Valuation measures reveal large imbalances
Valuation measures, such as price-to-income and price-to-rent ratios, reveal large imbalances within G-10 countries, with New Zealand, Canada, Australia, Sweden and Norway standing out. These overvalued markets are the places to watch closely, if not for a source of the next recession, then perhaps for a strong mechanism of its transmission.
More worryingly, both ratios in these countries are now well above the pre-crisis levels seen in the US, which is a clear laggard among major developed markets, having gone through boom and bust. Its house price levels just recently exceeded their peaks of 2006.
Sweden and Norway started seeing some moderation in both ratios over the past year. In the US, both ratios have improved significantly since 2011 as house prices started recovering, with price-to-income now at just below its long-term average and price-to-rent already above it.
Supply expansion contributes to cooling
On the supply side, as limited housing availability drove house prices higher, especially in certain cities, investment has been catching up with demand. Most countries have seen sharp pick-ups in residential investment as a percentage of GDP since the crisis.
More recent data, however, points to some moderation in residential investment in a number of countries, including Canada, New Zealand, Norway and Sweden, where expansion in supply is also contributing to the cooling of housing markets. There is a concerning similarity in the pattern of this highly cyclical component of GDP between these countries now and the US before the crisis, though the context is different. On this metric, the US remains well below its pre-crisis levels, while the UK is marginally above.
In some countries, the household debt burden is high and growing, with Australia’s and Norway’s debt-to-income ratios as high as 200 per cent. Household debt burdens have fallen in the US and the UK over the past decade and there has been some deleveraging in the Euro area on aggregate, but this has been mainly driven by Spain, Portugal, Ireland, Germany and smaller countries like the Netherlands and Greece. The debt burden has risen in France and other smaller members such as Belgium.
Whether housing bubbles can be deflated in a controlled manner, or whether this will inevitably lead to ‘popping’ with negative consequences for real economies and financial systems, remains to be seen. But it is a good start.