Our Opinion: 2021

Global Property prices are soaring

Nearly 15 years after a burst housing bubble tipped the world into the worst financial crisis for a century, booming property markets are triggering an uncomfortable sense of déjà vu.

Globally, prices are soaring. In Seoul, Korea, authorities are racing to curb an overheating market. In the US, prices are rising at the fastest pace for more than 30 years, and, in the UK, a buyer frenzy has driven the busiest first half on record, according to property website Rightmove.

Agent Knight Frank sees further signs of the froth in its latest global cities index, which monitors prices in 150 major markets and is now rising at its fastest pace since 2006. There are now 43 cities in the index which are seeing double-digit price growth. Before the pandemic, there was just one.

The price surges come as builders scramble for materials and labour to meet the demand. It also comes against the backdrop of stimulus poured on by policy makers warily watching the spread of the delta variant. Housing bubbles almost always mean trouble. Are central bankers in danger of taking their eye off the ball and fuelling another crisis in the housing market?

The Bank of England insists not, despite lender Nationwide’s house price index growing at its fastest pace in almost 17 years in June. Its latest Financial Stability Report barely mentions the residential housing market. Sir Jon Cunliffe, deputy governor for financial stability, is “by no means complacent” but says rate setters would “see how the market plays out” as temporary factors like the UK’s stamp duty holiday are withdrawn. He added that tructural shifts could keep prices high as working from home becomes a bigger part of the economy. The big worry for the Bank – that a more buoyant market translates into higher household indebtedness – hasn’t happened so far.

But while the US Federal Reserve buys up $40bn (£29bn) a month in mortgage-backed securities as part of its Covid stimulus, other central banks are already leaning against their housing markets. The Reserve Bank of New Zealand, where prices were already inflated by a chronic shortage of supply and rock bottom borrowing costs, has reimposed loan to value limits on mortgages, ended quantitative easing (QE) and signalled that interest rates could rise as soon as next month. House price stability has now been added to its mandate amid concerns over the potential damage to the financial system.

Adam Slater, lead economist at Oxford Economics, has warned that house prices in advanced economies could be overvalued by around 10%, based on a study of markets in 14 countries. That is yet to reach the estimated overvaluation of 13%-15% in the run-up to the financial crisis in 2006, but the question remains over what happens next.

The key point about this is that we’re in the middle of quite a strong rise in house prices, but we don’t know where the end point is. The boom might go on for another two years, in which case these measures would look a little bit more worrying. There is a fairly widespread opinion that much of the heat in the housing market is to do with tax incentives and it will fall away once those come to an end. The problem with that is that if we look at a global comparison, we see prices going up rapidly in a lot of places where those tax incentives are not in place.

Part of the reason asset prices are strong is because monetary policy is loose. It’s not just housing prices that are going up, equity prices are strong as well. You can look across a variety of asset prices and find a strong picture. Housing is part of that.

The saving grace is a lack of borrowing in the property market compared to the run-up to 2008. Mortgage credit as a share of GDP remains below levels reached before the financial crash, and was exaggerated more recently by the catastrophic collapse in growth caused by coronavirus lockdown.

Lending growth is slower than the pre-crisis period and compared with 2007-8, when a structured finance boom caused plummeting underwriting standards and surging ‘subprime’ debt. Better-capitalised lenders have also been much more cautious about who they lend to.

In the US, almost three-quarters of mortgage lending by value is going to those with very good credit scores, with subprime virtually non-existent. Bank of America data also shows just 2% of new US loans are on a variable rate compared to above 20% before 2007, vastly reducing the exposure of borrowers to an interest rate shock.

Bank of England figures also show that the share of all mortgage deals with a loan to value ratio of more than 90% dropped in the first quarter to just 1.1%, the lowest since it began collecting data in 2007.

High LTV lending is tiny, so even in the event of a sharp house price correction, bank losses will be small. In a low interest rate environment, the ability to service higher mortgage debt arguably offers some measure of housing market support.

Another factor working against the imminent pop of a bubble is the absence of a building frenzy. We’ve not had that big boom in supply that we did in a number of markets that we did before 2008. Spain and Ireland, for example, were seeing huge numbers of new build properties come to the market.

The bigger picture of why house prices have gone up so much in so many countries over quite a long period now has as a relatively straightforward answer, which is that real interest rates are super low. Supply factors are not automatically self-correcting for residential investment, and can feed bubbles.

That said, the bigger threat might be from commercial property than house prices, as working from home trends mean more empty space and falling valuations. That puts a hole in bank balance sheets and forces companies borrowing against buildings to put up more collateral. There is a secular change in residential property markets, and there is also a secular change in commercial property and we don’t really know how that’s going to play out. If everyone is downsizing trying to get costs down, then you’re talking about rising vacancy rates.

So far, a combination of cheap mortgages, loose monetary policy and a lack of supply should reduce the risk of a violent correction”. But US Treasury Secretary Janet Yellen has voiced concerns about the longer-term housing affordability, and the benefits of buoyant house prices will be passed down to future generations unevenly. Even if the bubble doesn’t burst in dramatic 2007 fashion, the Covid property boom threatens to entrench inequalities brought to the fore by the pandemic.

2nd August 2021