House prices in the UK are still extremely high. No secret about that.
But we’ve known for a while that prices at the high end (and increasingly the lower end) in London are struggling. They’re still unaffordable, but they’re a tiny bit less unaffordable than they once were.
However, while it’s tempting to look at our market and wonder what’s going on (is it Brexit? Is it the Northern Powerhouse?), the reality is that it’s not just London.
In fact, house prices across the globe – particularly the expensive bits – are starting to come off the boil.
Coincidence? We doubt it…
From Scandinavia to North America, property markets are wobbling
It’s early days, but house prices across the world’s most expensive markets seem to be starting to struggle.
Here are a few headlines for you. In Norway, prices across the country started falling last year, after rising by 12% in 2016. By December 2017, they were falling at an annual rate of 2.1%. In the capital of Oslo, they fell by 6.2%.
Now, Norwegian houses are not cheap. Indeed, credit ratings agency Moody’s concluded that – compared to the historic norms, as judged by the rents to house prices ratio – Norway had the single most expensive market of 20 advanced economies (including Britain, although that’s partly a function of Britain’s consistently bubbly housing market).
Not coincidentally, the central bank’s main interest rate sits at 0.5%. However, the bank has hunted at raising rates. And at the start of last year, it also imposed a few mortgage lending restrictions – including a requirement for higher deposits and lower income multiples.
Elsewhere in Scandinavia, we have Sweden. In November, house prices were down by 0.2% – the first annual fall since May 2012. “The drop,” says Bloomberg, “is being led by high-end apartments in Stockholm.”
The country has introduced tighter mortgage rules, but there has also been a steep increase in supply.
Or how about Canada? Once a blisteringly hot market – with prices rising at an annual rate of more than 30% at one point last year – house prices in Toronto have fallen by 8.9% since May 2017, according to the Toronto Real Estate Board. According to Bloomberg, that’s the steepest decline on record – although said records only go back to 2000. Prices are now up just 0.7% on an annual basis.
What’s changed here? A foreign buyer tax has been introduced (although apparently not a big driver of sales in the city). The government has introduced tighter mortgage guidelines. And the number of new listings has picked up (although presumably that’s a side effect of people realising the fun’s over).
And then there’s an anecdote from another very expensive area – Manhattan. New York’s answer to Mayfair has seen rents starting to fall hard. In December, rents fell by 2.7% year on year (you’re still having to pay an average of more than $3,000 a month). And that doesn’t include “sweeteners” such as “free” months or gift cards.
In this case, it’s being put down to rising supply – too many new luxury developments coming on stream at once.
Even in Australia – the “lucky country” – there are signs of house price growth easing off, although you’re still talking about 6.1% annual gains in November, compared to 9.7% to the end of June.
My colleague Merryn has written about the state of the UK housing market in a piece we’ll have on the website early next week, but there are elements of similarities – tighter rules, higher supply at the luxury end, concerns about rising rates.
So what’s going on?
The real driver of rising (and falling) house prices
It does seem odd that we’re seeing a bit of a global synchronisation with house price wobbles here.
There seem to be a few things going on. Firstly, politically, the climate has turned against property speculation. So you’ve got foreign investors being targeted. There are few things more politically popular than blaming a foreigner – even better, a rich foreigner – for a domestic problem, and governments across the globe have lapped this story up.
There are also moves in many countries to tax owners of second homes more vigorously, be they landlords or simply people who own more than one home.
Underlying all this however, is the more significant point – it’s not about the specifics, it’s about the tone. If you’re a “globalist” rich person, you now want to keep your wealth liquid. The number of guaranteed safe havens has been narrowing steadily – it’s all part of the anti-globalisation swing – and nowadays there just isn’t anywhere obvious where you might want to set up a permanent base where you can be reasonably sure that the political environment won’t swing against you badly.
So that’s politics. The next shift is supply: this is mainly affecting the high-end areas. Usually with house prices, we tend to focus on demand – and that makes sense. Unleashing more money for mortgage lending (and thus more money for buying houses) takes two seconds. Unleashing more supply (building actual houses) takes forever in Britain and isn’t much faster in most countries.
So usually demand is all that matters. Because demand is, in theory, effectively infinite (there’s no technical limit to the volume of money that can be created to pump into the housing market), whereas supply is pretty tightly restricted by comparison.
But eventually, given enough incentive, supply does grow. And if you have demand remaining static or being curbed (in the form of mortgage restrictions), then you have a (probably brief) window in which that supply can actually make a difference to prices. And that seems to be happening right now too.
However, that leads us to the real key point on this: it’s not really about supply rising, it’s about the volume of money going into the property market having reached a peak.
We now know that – barring another deflationary collapse event, which would of course be bad news for all asset prices, including houses – interest rates have now bottomed. Central banks across the globe are now talking about pushing them higher, or at least easing off on the quantitative easing.
That means the cheap money impetus to drive these ultra-sensitive markets higher just isn’t there any more.
What’s next? We’ll see. Property markets are among the most politically manipulated in the world, so don’t be surprised if governments step in to ease the restrictions they’ve imposed almost as soon as prices show signs of wobbling.
But it’s a valuable lesson – more so even than bond prices, the global property market is proving to be a real canary in the coal mine in terms of warning of higher interest rates. I’ll be keeping a close eye on developments all over the world as a result.