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Is this the end of the global house price boom?

A new survey has highlighted the true impact of the ‘deadly economic duo’ on global property markets.

According to figures compiled by the Global Property Guide during the first quarter of 2008, 21 countries saw house prices fall in real terms (i.e. after adjusting for inflation), and only 13 countries saw prices rise.  

Additionally, the figures illustrate that in countries where house prices are not falling, they are clearly losing momentum. The biggest house price fall was in the Latvian city of Riga, where prices were down 38.2% from a year earlier. House prices in the US also fell by around 18% after inflation. In Europe, significant house price falls were recorded in:

- Ireland (- 13.2%)
- Luxembourg (-5.8%)
- Portugal (-4.3%)
- Malta (-4.9%). 

Surprisingly, UK house prices were only slightly down from a year earlier, with the house price crash having begun in earnest in early 2008.

In Japan, the housing market is losing momentum once again. Indeed, the Urban Land Price Index for 6 major cities was up only 4.1% year-on-year (2.9% after inflation) and down from 7.8% over the same period in 2007 (7.9% after inflation).

Rising inflation

In contrast, 28 countries saw house prices rise over the last year, while only 6 saw prices fall. However when property prices are adjusted for inflation, the picture looks entirely different. Skyrocketing oil, food and commodity prices have pushed inflation up around the world.

In the Ukraine for instance, nominal house price growth was sharply down from 79.5% in the first quarter of 2007, to 18.2% in the first quarter of 2008. But when adjusted for inflation, property prices actually fell by -6.4%. In real terms, property prices also fell in the following countries, despite nominal price rises: 

- Norway
- Spain
- Greece
- South Korea
- New Zealand
- Indonesia
- South Africa
- Israel
- Estonia
- Lithuania,

On the other hand, strong house prices increases were observed in a handful of emerging economies. Ahead of the pack was China (Shanghai), with an enormous 40.5% nominal house price surge over the last year.  Other countries with impressive nominal house price increases over the last year include:
 
- Bulgaria (31.6% y-o-y)
- Hong Kong (31.1% y-o-y)
- Singapore (29.8% y-o-y).

Strong house price gains also took place in Cyprus, Australia and Taiwan. Again, when adjusted for inflation, many of these price rises look much less impressive.  The world’s top-performing housing market (after inflation) was not China or Hong Kong or Singapore, but Slovakia, where real house prices rose by 29.3%. 

Causes of the downturn

According to Global Property Guide, there are three main factors behind the end of the housing boom:

1. House prices have become stretched in many countries after a very long boom. The main indicator of this is the price/rent ratio, which compares the relationship between the buying price of a dwelling, with its rental price.

As the boom progressed, buying prices became higher (in relation to rents and financing costs) in many countries, leading to decisions by some buyers to rent instead of buying.  Mortgage-holders also came under extreme pressure as interest rates rose.  A key lesson is the critical importance of monitoring price/rent ratios, to ensure that house prices valuations stay within reasonable limits. 

2. Inflationary pressures forced central banks to raise interest rates.  This particularly impacted European countries where mortgage loans were primarily made on variable interest rate terms. Countries with heavily indebted households are also vulnerable when interest rates increase.  In developing countries, the overall economy (which strongly sways the mood of the housing market) is sometimes very sensitive to interest rate changes or to direct intervention by the monetary authorities.

In some countries, mere threats of interest rate hikes are enough to shake the stock market and scare away foreign investors. But conversely, developing countries typically have smaller mortgage markets, reducing the impact on housing markets.

3. Unsound regulatory and banking practices in the US and elsewhere led to over-lending by mortgage providers which, when these unsound loans began to go bad, caused a financial crisis. The bad news spread both by a panic contagion effect, and because many banks outside the US turned out to be more exposed than initially expected.

Commenting on the figures, a spokesperson for Global Property Guide observed: “Inflation remains an extremely challenging problem for the world’s central banks. In addition, the financial shocks to the world’s banking systems resulting from house price falls remain to be worked through.

“Until these financial systems feel more confident that their problems are behind them, loan volumes are likely to fall. Therefore, it seems likely that the world’s house price momentum will continue to go down”.