Thursday, July 08, 2004

Housing Watch: Global Housing Market?

The NYT and FT present a story indicating something that the oldman has been watching for a while now. The convergence of property asset market trends around the world. Gives a whole new meaning to the idea of the entire planet coming closer together.

But in all countries, pockets of blistering hot-house prices sit alongside cooler spots such as Mr Salvi's Docklands. That complicates the task of central bankers trying to engineer a correction without causing a collapse.

Evidence so far suggests that housing markets where rates have risen are slowing gently, rather than suffering from panic selling. That is good news for policymakers worried about what a sharp jolt to confidence could do to their over-leveraged economies. Whether this sense of calm persists depends on how high rates are expected to rise.

In Australia, two interest rate rises in quick succession last year appear to have cooled house price inflation in Sydney and Melbourne, its two biggest cities.

In the UK, the first quarter of the year saw feverish price rises, especially in the less affluent north of England. But after a rise of 100 basis points in interest rates since November, and especially following Mr King's warnings, many estate agents report slackening home sales and falling asking prices. Mortgage lenders have also seen signs of a slowdown in June. The evidence in Britain to say this is the long-awaited correction, however, is still inconclusive - indicators of activity have fluctuated wildly for several years and there have been several false peaks...

Given the pace of global house price growth recently, few would dispute that properties in many countries are to some extent overvalued. In a recent research paper, Goldman Sachs, the investment bank, warned that the US, UK and Australian housing markets were overvalued by 10, 15 and 29 per cent respectively, after prices had risen by 37, 96 and 82 per cent in real terms since the mid-1990s. It said all three markets were at risk from higher rates.

The European Central Bank has not yet raised interest rates in the eurozone, but there too, house prices have rocketed in many countries. Cheap credit has underpinned housing booms in Spain and Ireland, partly because mortgage rates are flexible, and even lacklustre economies such as those of France and Italy saw house price rises above 5 per cent - well in excess of economic growth.

Globally, the ratios of house price to income are at their highest levels since the previous housing market boom turned to bust in the late 1980s.

The ideal "soft landing" is nothing more than a pricing plateau. When prices get ahead of fundamentals, the market can trade sidewise at the same level until the underlying conditions come up to the point where they support the pricing levels. A correction is when there is no plateau and instead of hanging in thin air waiting for the ground to get high enough to support the prices, the prices vault much higher than underlying real aggregate demand because of speculation and then fall back sharply with dire results.

However there is a temptation in engineering "soft landings" to artificially inflate asset markets. This has happened several times since the late nineties in minor forms and it appears that Greenspan and company are about to engineer the biggest asset speculative inflation bubble yet. "Bigger than the internet bust". Actually that correction wasn't so bad given all things. The warning signs are in the bickering amongst trade tariffs and subsidies along with the insidious and almost invisible but deadly slide of the dollar.

Normally it would be crazy to be in an emerging market when the US interest rates are going up, but I'm not sure this time around. If the dollar takes a dive then the whole dynamic could change. It would be a very painful unwinding however. It's not here yet, but something really funny is going on.


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