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British Press Says Property Price Bubble Now a Global Phenomena

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By Allister Heath

Sunday Business, London

RISMEDIA, July 30 – (KRT) – The property bubble has gone global. From Beijing to Cape Town, from Madrid to Honolulu, house prices have risen to unsustainable heights, fuelled by low interest rates.

Like the equity bubble of the nineties, which started on Wall Street before contaminating other markets, the housing bubble of the noughties, which originated in London, Sydney and Chinese coastal cities, is now spreading around the world. And like the equity bubble before it, the correction, when it inevitably comes, will be painful and could threaten the worldwide economic recovery.

In a report to be published this week, Morgan Stanley, the US investment bank, examines property conditions in 23 of the world’s largest economies, representing 94 percent of world gross domestic product (GDP) by purchasing power parity and 96 percent of the value of the developed world’s housing stock.

The conclusion of its study is shocking. Confirming the findings of other international institutions, Morgan Stanley found that over two-thirds of the global economy is either already suffering from a residential property bubble or is at severe risk of doing so very soon.

Full-blown housing bubbles currently exist in at least 25 percent of the global economy, whereas another 40 percent is put in the “bubble watch” category.

Australia, the United Kingdom, China, South Korea, Spain, the Netherlands, and South Africa are all suffering from dramatically over-valued, bubble-conditions housing markets; the United States, Canada, France, Sweden, Italy, Hong Kong, Thailand, Russia, and Argentina are all close to the bubble-stage, though are not quite there yet. Of these latter economies, the US is probably nearest to being a full-blown bubble already; indeed, many analysts are convinced that prices in large parts of the country are ridiculously over-priced.

In all those countries, ultra-low interest rates introduced by central banks desperate to stave off deflation after the dot.com crash triggered an explosion in borrowing. Flush with cheap cash, consumers went on spending sprees, splashing out on goods and services. Rock-bottom interest rates also led to collapse in debt servicing and mortgage payments: in some cases, the cost of home ownership halved in a few months.

It suddenly made sense to buy houses. Families started to bid up prices, while a growing band of investors entered the market to enjoy capital gains that seemed no longer possible in the equity markets.

In retrospect, the emergence of a series of bubbles in asset prices since the late 1990s, most recently in housing, should have surprised nobody. Globalisation and intense price competition — in newly tradeable services as well as goods — has reduced corporate pricing power, triggering a significant structural change in the forces shaping inflation.

Thanks to the huge resources of Chinese factories and Indian call-centres, plenty of capacity remains in the global economy, allowing a rise in demand to be met by extra supply.

Consumer prices therefore now take longer to react to rock-bottom interest rates and to an injection of money and credit into the economy; instead, excess liquidity first shows up in asset markets such as equities, bonds, property or commodities, where prices are far more flexible.

“It’s just like pushing on a water balloon — inflationary pressures migrate elsewhere in the system to the point of least resistance. In today’s post-equity bubble world, that elsewhere is the property market. The equity bubble of the late 1990s was but the first example of this phenomenon,” says Stephen Roach, chief economist of Morgan Stanley.

After the dot.com bubble imploded, excess liquidity flowed into bond and property markets, two other major asset markets. “Seen in this context, asset bubbles are a perfectly logical consequence of a more generalised monetarist model — one that sees the money supply driving some combination of prices in the real economy and prices in asset markets,” Roach argues.

A similar argument is made by Tim Congdon, chief economist at London-based Lombard Street Research. Traditionally, inflation has been defined as “too much money chasing too few goods” but Congdon believes that this is too restrictive. He prefers instead to define inflation as “too little money chasing too few goods and assets”.

In Europe, the three most over-valued property markets are those of the UK, Spain and the Netherlands. Some economists in the City of London believe that UK homes are over-valued by 45 percent; the average estimate appears to be between 15 percent and 25 percent. A collapse in the UK market is by no means guaranteed but the omens are not good. Prophets of doom, including Durlacher, Smithers & Co., Capital Economics and Dye Asset Management, are forecasting a serious crash and a decline in house prices in both real and nominal terms over the next few years. The optimists — if one can call them that — expect house prices to fall by a few per centage points at most before stagnating for most of the rest of this decade to allow wages to catch up with prices.

After that, supportive demographic trends, including a rise in the number of people living alone and increased immigration, together with a limited supply of new homes caused by restrictive planning laws, should lead to a return to healthy 5 percent-6 percent growth a year in house prices. A major risk remains for the long-term health of housing as an investment in Britain, however: there are growing indications that the Treasury will put up taxes on housing after next year’s general election, perhaps by hiking stamp duty and tightening the link between property prices and council tax.

Spanish property owners have also benefited immensely in recent years, with the euro zone’s inappropriately low one-size-fits-all interest rates giving the market a massive boost. House prices have surged by more than 120 percent since December, one of the sharpest increases in the developed world.

The most outrageous prices are to be found in Spain’s coastal regions and in small islands, which have benefited most from overseas purchases. Investment in Spanish property from abroad surged from 0.3 percent of GDP in 1997 to 1 percent in 2003; foreign demand will probably prevent the Spanish market from crashing too badly when the bubble finally bursts.

The great fear is that the UK, Spanish and Dutch property bubbles go the way of Australia’s — the first of the over-priced housing markets to see its bubble go “pop”. After surging by 15 percent last year, Australian house prices started to crash in the first few months of this year as interest rates rose and changes made in the tax code to discourage buy-to-let speculators began to bite. Values are down by between 10 percent and 15 percent already in the big Australian cities; economists expect further declines. House prices are currently trading at a ludicrous 58 times yearly rental yields, against a long-term average of 31 times and an equity market prices to earnings ratio of 16.5 times. Housing affordability indices are at their worst level since 1991 when mortgage rates were 13-15 percent, compared with 6-7 percent now, which suggests that prices will fall further when interest rates rise again.

Home owners in Europe who may be tempted to dismiss Australia’s experience will find little reassurance from the US, despite headline figures which suggests that American house prices rose 7.7 percent in the year to the first quarter of 2004.

There is no real national housing market in the US, so localised bubbles co-exist with very weak property markets. Up to 15 metropolitan areas could suffer a price crash of 10-15 percent as interest rates go up, warns Dick Berner of Morgan Stanley — largely in regions which have seen values close to double in the past five years, confirming that prices can go down as well as down.

During the first quarter of 2004, prices dropped in Vermont, Alaska, North Dakota, South Dakota, Iowa, and Nebraska, a stark deterioration from the final quarter of last year, when no states reported declining home prices. Prices dropped in 39 of the 220 Metropolitan Statistical Areas, compared with only three in the fourth quarter of last year. By contrast, prices surged by 12.2 percent on average across California, Oregon, Washington, Hawaii and Alaska, fuelling fears of looming crash. In New York, prices continue to move ahead.

Other European countries are seeing strong price gains, even if not yet at bubble levels. French property prices rose by a record 14.2 percent in 2003, after a 9.2 percent rise in 2002 and a 6.5 percent uplift in 2001. Prices increased by 13.9 percent in the first quarter of 2004, year on year. The availability of mortgages for French buyers, and their interest in buying a property for investment, have increased dramatically in recent years. The buoyant housing market is likely to continue to support French households’ throughout this year, as last week’s buoyant consumer spending data confirmed. In real terms, however, French property prices remain below their 1991 peak, according to Morgan Stanley. There are also signs of overheating on the supply side which, if not corrected, could help inflate a price bubble in the next two years.

House prices have also grown strongly in Italy, even though some statistical sources paint slightly different pictures of the market. The ISI Residential Index peaked in February-March, growing 22 percent in the year, and since then growth slowed moderately to around 16 percent. Some economists suggest a sharper slowdown though all agree that Rome and Milan are still seeing double digit-gains. Mortgage lending peaked in February 2003 when it hit a growth rate of 28 percent and is now closer to 18 percent. The break-neck boom in mortgages from 2002 reflected an earlier deregulation of lending. Today’s growth is due to low interest rates caused by Italy’s membership of the euro zone, which has allowed it to piggy-back on countries with lower government debt and more political stability.

While there are plenty of problems in the world’s mature economies, emerging markets are beginning to worry analysts almost as much, with China under especially close scrutiny. Prices are up by only 20 percent since 1998 nationally, although by much more in Shanghai and Beijing, which account for 14 percent of the total market. “China’s domestic monetary tightening has occurred in the face of the coming normalisation of Fed policy. This is a potentially lethal combination for China that could have a major impact on the capital inflows that have driven the Chinese property cycle so sharply to the upside. It looks to me as if the China property cycle is on the verge of a major bust,” warns Andy Xie, China economist at Morgan Stanley.

The situation is a little better in South Korea, even though there too houses are over-valued. There, the local bubble began in mid-2001 when prices started to surge, taking the increase for the year to 10 percent, followed by another 16 percent in 2002 and 6 percent last year. Today, nationwide South Korean house prices are 40 percent higher than their trough in 1998; in Seoul, prices are up by more than 60 percent. With the central bank’s official overnight interest rates stuck at 3.75 percent since July 2003 and inflation of 3.6 percent, real interest rates are at close to zero, which has kept the market going despite a government crack-down on speculation and a depressed economy. But plans to boost South Korea’s housing supply, together with higher interest rates, could yet prick the bubble.

South Africa remains a candidate for the title of the world’s most over-heated property market. Prices there have been boosted by a combination of increased buying by foreign investors (particularly in the Western Cape region) and by a cumulative cut of 5.5 percentage points in the Reserve Bank’s repo rate over the June to December 2003 period. In the first five months of 2004, South African house prices surged by 24 percent year on year, even faster than the 19.2 percent growth in 2003 and 15.3 percent in 2002.

But prices in Hong Kong have grown even faster during the past year. Since their mid-2003 trough, broad residential prices are up 32 percent, with prices in “popular developments” (that is large residential estates with the highest turnover) jumping 43 percent. Yet compared to the 1997 peak, housing prices are still down by 55 percent, which suggests that property values in Hong Kong are still fairly valued, unlike those in South Africa.

In Thailand, a combination of expansionary policies by Prime Minister Thaksin Shinawatra, increased demand from a wealthier population and faster economic growth across the region has triggered a 30 percent to 40 percent recovery in house prices since 1991. A bubble has undoubtedly erupted in the up-market section of Thailand’s housing market, with the burgeoning Thai middle classes currently being offered the choice of around 50 new condominium developments in Bangkok alone. However, the lower- and middle-income segments of the Thai housing market seem still to be well supported by sound structural reasons, with strong demand relative to supply.

Unsurprisingly, there are no proper official statistics on Russian house prices. The Institute for the Economy in Transition does produce data for Moscow, however, and the picture of the housing market it paints is one of a runaway and unsustainable boom in 2003, following a strong but less buoyant 2002. Last year the average price of Moscow apartments in dollar terms was 45.4 percent higher than it was in December 2002, an astonishing rate of growth. After adjusting for inflation, the price of apartments surged by nearly 19 percent in rouble terms last year.

Many crucial laws have been adopted in the past couple of years, underpinning property prices, says Diana Choyleva, an economist at Lombard Street Research. “These have unleashed the strong pent-up demand for credit, especially for mortgage and consumer loans. Such basic laws as the right to own property and land, the right to sell it, and the right to pledge it as security for a mortgage did not exist until recently,” she says. While the property market is expected to cool in the second half of this year, the average price of a Moscow apartment has already surged from slightly under $950 at the end of 2001 to $1,600 by end-2003.

Anybody who believes that housing is always a safe haven, regardless of time or place, ought to take a closer look at Germany, Singapore, India or Japan. German house prices have been falling for a decade and are likely to continue to do so as the population shrinks over the next few years. In Singapore, property prices are still down some 40-50 percent from their peak in 1996. Since rebounding moderately in 2000, prices have declined a further 15-20 percent.

In Japan, housing and land prices are now down a devastating 43.2 percent compared with their 1991 peak, taking the current level back to pre-bubble levels. Fortunately, there are now signs that the market is bottoming out, with surveys revealing that 40 percent of land prices in Tokyo are either on the rise or flat.

The Indian property market has also fared poorly in recent years, despite faster economic growth. Prices slumped by 30 percent between 1995 and 2000 and are now growing by only 3 percent to 4 percent a year — little consolation for those who have lost their shirts in the downturn.

Around the world, high property prices have boosted the wealth of homeowners; a crash will hit consumer spending badly, especially in the UK, US and Australia.

“Courtesy of property-induced wealth effects, the global economy was neatly able to sidestep the potentially devastating aftershocks of the burst equity bubble,” says Morgan Stanley’s Roach. The house price bubble kept the global economy afloat when shares slumped; but as interest rates continue to rise and the global property bubble finally bursts, there will be no secret weapon for the global economy to turn to this time.

UKpound preceding a numeral refers to the United Kingdom’s pound sterling.

© 2004, Sunday Business, London. Distributed by Knight Ridder/Tribune Business News.

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shaun

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