Our Opinion: 2019

Global property prices easing

The worldwide housing bull market is on its last legs. But not all countries are equally vulnerable to a downturn.

In 2018, the Emperor Group in Hong Kong unveiled a rather clinically named property development. “The Unit” comprised a block of 68 serviced apartments. Sixty-four of these were “nano” flats with floor areas as small as 91 sq ft – about the size of two king-size beds. But despite the tiny floor plans and rents of £1,100 per month, nearly all of the flats were occupied within a few months.

It’s not just Hong Kong. Absurdly expensive housing markets have become a global phenomenon. A decade of record low interest rates has fuelled massive house-price growth from the UK to Australia. These days, homes in the posher parts of global cities move in sync because they have become a distinct asset class, as opposed to a home. A global market of buyers made up of rich individuals from both developing and emerging markets, investment trusts and private-equity firms have snapped them up, driving up the prices of smaller properties nearby. For instance, Chinese investors in particular have been a key driver behind booms in Sydney and Vancouver.

But the global property boom is now going into reverse. Global interest rates bottomed in 2016. Central banks are now either removing stimulus or actively tightening monetary policy. This raises the cost of mortgages and reducing affordability, making overvalued markets more vulnerable to reversals. House prices relative to incomes are 73% and 48% above the long-term average in Auckland and Sydney respectively, for instance. As local residents have been priced out, governments have begun to tighten lending standards and to tax property more aggressively – witness Britain’s 12% top rate of stamp duty. They are also increasingly asking awkward questions about where people’s money comes from, and with good reason. According to Canada’s Global News, more than 10% of 2016 property sales in one area of Vancouver were “tied to buyers with criminal records”.

Hong Kong, which took the top spot in UBS’s latest Global Real Estate Bubble Index, now appears to be in a bear market. House prices in Hong Kong have gone up by 10% a year on average since 2012, according to UBS. Apartment prices have tripled in a decade. But now one house price index is down by 5% from its peak in August 2018. Buyers from the mainland are cutting back as Chinese growth decelerates; sales at luxury watchmaker Richemont have slowed. Banks in Hong Kong are aggressively cutting property valuations as the city’s housing market weakens, threatening to fuel a downward spiral in prices, according to brokerage CLSA, quoted on Bloomberg – the risk is that lower valuations mean less lending, which in turn will hit prices. All of this describes a classic housing-market slump. But not all foreign markets look poised to follow the world’s most overheated into a downturn.

America looks set for a slowdown rather than a slump. The latest Case-Shiller national home price index shows prices are rising at an annual pace of 5.5%, the slowest pace in two years. Buyers are getting squeezed by rising mortgage rates and by prices climbing about twice as fast as incomes. Lat autumn, mortgage applications fell by 12%. Mortgage interest rates also rose above 5% in October for the first time since 2011, while interest payments for a medium-income household buying a medium-priced house have climbed to 17%, a ten-year high. That said, the affordability of a medium-priced property is still more favourable than at any time from 1973 to 2008. But that is not much help for house-hunters when there are no medium-priced homes for sale. Lower-cost houses are especially scarce.

Still, inventory levels (the active supply of properties on the market) are close to record lows, which will help to prevent a sharp drop in prices. Coupled with the fact that homes are not obviously overvalued when compared with incomes or rents, without a major economic or financial market shock, all that suggests that another house-price crash is certainly not inevitable. Furthermore, the housing sector in the US is helped along by a healthy labour market and steady economic growth. This points towards a stabilising trend for house prices, rather than a sharp decline.

Given the shortage of affordable houses to buy, it’s no wonder that an emerging sub-sector of the US housing market is “build-to-rent”: the development of houses specifically to be rented out rather than sold, with properties, or shares in the properties, generally owned by institutions such as pension funds that are looking for the reliable income provided by rental payments.

And after decades in the doldrums, the German property market has suddenly come alive in the past few years. German property prices in 2017/18 had their strongest period of growth in at least three decades. House prices in large metropolitan areas went up by 80% between 2009 and 2017. Low interest rates, strong economic growth and low unemployment underpinned growth. Berlin has seen the fastest house-price growth. In March 2018, the capital city came out on top of a global ranking of 150 residential property markets put together by estate agent Knight Frank, sealing its transformation from a grungy backwater to one of Europe’s most sought-after locations. Asking prices in Berlin were up by more than 20% year-on-year. Three other cities – Hamburg, Munich and Frankfurt – also made it into the top ten, with increases of over 13%.

While property in major German cities looks overvalued by past standards, the uptrend is likely to continue for several more years. German house prices started from a very low base. Several factors could change the outlook: a huge rise in the number of new houses built; an abrupt drop in demand due to less immigration; a switch towards renting because purchase prices have got too high; and a sharp increase in interest rates. But at present there is no sign that the first three factors are imminent in any major cities. And while interest rates are likely to go up in the years ahead, the European Central Bank is unlikely to be in a hurry.

In contrast, the property markets in Australia and Canada, for instance, are sick and are in for a prolonged squeeze. Falls are long overdue and are proving steep. This isn’t yet having an obvious effect on sentiment generally. But history suggests that, after many years of easy gains, a reversal leads first to denial and then to a panic. A sound reminder that property should only ever represent a portion of an investment strategy.

7th January 2019