“Central bankers giveth and central bankers taketh away,” says Neil Shearing of Capital Economics. After fuelling a two-year long worldwide boom in house prices with ultra-low interest rates, monetary policy is now tightening and starting to weigh on global property.
By the last quarter of 2021 prices across the 38 members of the OECD (a club of developed countries) had risen 16% in two years, says Valentina Romei in the Financial Times. “That is the fastest pace since records began 50 years ago.”
Now rising mortgage rates are reversing the boom. In America average rates on new mortgages have leapt from 2.9% at the start of the year to 5.9% now, says Shearing. That has caused US mortgage applications to tumble 28% from their peak, with new home sales down 17%. Trouble in the US mortgage market brings back nasty memories of the 2008 crisis, but there is “less leverage in today’s housing market”. Stricter lending standards and more robust bank balance sheets should prevent a repeat of the Great Recession.
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The countries at risk
Instead, the situation in neighbouring Canada – where prices have more than tripled since the millennium (compared with a 60% gain in the US) – is more concerning, says The Economist. Canada’s long housing boom has rested on a shortage of inventory in big cities such as Toronto and a steady “influx of immigrants”. Yet in April the government banned foreign investors from buying Canadian homes for two years, and a construction boom should see 2.35 million homes added this decade, more than will be needed to satisfy new household formation.
Prices in Toronto have plunged almost 9% since February, says Enda Curran on Bloomberg. Canada ranks fifth on a Bloomberg index of OECD members facing the greatest “risk of a price correction”. The index is based on factors such as price-to-income ratios and credit growth. New Zealand, the Czech Republic, Hungary and Australia round out the top five. The UK comes in mid-table at number 15. Last week Halifax reported annual UK house-price growth of 13%, the highest level since 2004, says Martin Strydom in The Times. While strong employment and the pandemic savings cushion should prevent a big crash, the UK property market appears to be heading for a softer period now that “households are facing the biggest annual drop in disposable income since the 1950s.”
Property is still bubbly in some places. Prices in Portugal jumped 13% in the first quarter of 2022, reports Sónia Santos Pereira in Diário de Notícias. That comes on the back of a 27.5% gain between March 2020 and January 2022, a European record. Attracted by relatively cheap prices and “golden visas”, foreign investors are driving the boom.
New Zealand is the canary in the coalmine
New Zealand is “the canary in the coal mine”, says Sharon Zollner of ANZ Bank. Spared the worst of the pandemic, New Zealand was one of the first developed countries to start tightening monetary policy. Since October last year the Reserve Bank of New Zealand (RBNZ), the central bank, has raised rates from 0.25% to 2%. This week it announced a further hike to 2.5%, with rates forecast to peak at 4% next year.
That makes the RBNZ “the first of its peers to lift its benchmark rate above a neutral level”, which it reckons is 2%, say Matthew Brockett and Enda Curran on Bloomberg. That means that rather than stimulating demand, monetary policy should now start to weaken it. Concern is growing that the central bankers are going too fast, says Lucy Craymer on Reuters.
New Zealand’s economy shrank 0.2% in the first quarter and may have entered recession in the second. “One survey showed business confidence has fallen to its lowest level since the start of the Covid-19 pandemic.” The housing market is down 9% since a peak last November.
The falls do little to improve affordability, say Nic Fildes and Nick Peterson in the Financial Times. The median home in New Zealand is worth ten times the median annual income. Data from consultancy Sense Partners shows that the median New Zealand house price has jumped by 43% in two years.
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