Structural cracks

Trouble ahead for global house prices

AFP

OUR round-up of house-price indicators (see table) suggests that any crash is far from universal. Only five countries have suffered annual house-price falls in the latest data and two of those—Japan and Germany—have been in the doldrums for a decade.

This relatively rosy picture may reflect the use of annual, rather than monthly, figures. In particular, the impact of the credit crunch, by restricting the availability of mortgage finance, is having a negative effect on demand. It is a fairly safe bet that the data will look less reassuring in six months’ time.

Some markets have been doing extremely well, even if more uncertainty has crept in lately. Singapore and Hong Kong have benefited from the booming Asian economy. DTZ Debenham Tie Leung, an estate agency, found that the number of homes bought by foreigners in Singapore jumped by 71% last year. Both Singapore and Hong Kong manage their exchange rates against the American dollar. Hence they import American monetary policy, which may be too loose for their domestic conditions. The cheaper real cost of finance encourages more property buying.

Similarly, Spanish and Irish housing probably boomed earlier this decade because of their economies’ fringe status in the euro zone. As a result of the “one-size-fits-all” monetary policy, interest rates in both countries were set too low.

Whereas Irish house prices have been falling, the Spanish numbers still show a small annual increase. But Julian Callow of Barclays Capital reckons that may reflect the way the numbers are calculated: by valuers, who may be cautious about cutting their estimates. Even our figure of 3.8% represents a fall in real terms, since the inflation rate is 4.2%.

Spain and Ireland stand out as economies dominated by housing. According to Goldman Sachs, construction and housing-related employment in both countries made up 13% of all private-sector jobs at the end of last year, against 9% in America and 5% in Germany. Nominal residential investment was 11% of GDP in Ireland and 9% in Spain, against 6% in America.

That has caused a glut. More than 4m Spanish dwellings have been built over the past decade, according to Britain’s Royal Institution of Chartered Surveyors. Its survey of European property suggests that far more Spanish houses were being built last year than are likely to be needed.

Spanish banks are tightening conditions on mortgages as the number of non-performing loans rises, pricing out potential buyers. As a result, house sales are plunging. The number of completed sales in February was 24.4% below the same month last year, according to the National Institute of Statistics.

Both Spain and Ireland have parallels with the American housing market, where the inventory of unsold homes has hit a 20-year high, according to Capital Economics. There the pace of price decline, as measured by the S&P/Case-Shiller indices, has been accelerating.

Britain is something of an exception. Whereas housebuilding grew by 187% in Spain and 177% in Ireland between 1996 and 2006, the British increase was just 12%. Planning restrictions meant fewer homes were built, which may also explain why house prices in the country have almost doubled, in real terms, since 1999.

Some may take this to mean that British house prices are less likely to fall. But potential homebuyers will undoubtedly be hit by the change in lenders’ attitudes; a sizeable deposit is now normally required. Ed Stansfield of Capital Economics reckons prices may fall by at least 20%.

Two other markets at risk are Australia and New Zealand. Since 1997 house prices have risen faster in Australia than New Zealand, but Goldman reckons that the latter is more vulnerable. Real house prices are 82% higher than they were in the last quarter of 1999, and have risen by 70% relative to household income, the biggest increase in all the countries Goldman has surveyed.

If house-price weakness does spread more widely, there may be important economic consequences. There is plenty of debate about the size of the “wealth effect” of higher property prices on consumer demand. But it will hardly help that fuel and food prices are soaring at the very moment when the value of bricks and mortar looks about to sag