31 July 2014

Five housing bubbles that could suddenly pop

Housing bubbles are being seen around the globe - here we take a look at five of the frothiest that could burst violently.
​​housingbubble_auto_tn_300.pngUnited Kingdom

Prices in the UK have soared in the last year or so, with average values up 11 percent in 12 months. At the same time wages have barely risen. But the pace of growth is slowing - home prices were up just 0.1 percent in July, the weakest rise in over a year. From their frenzied peak at the start of 2014, mortgage approvals are down 15-20 percent.​​​

John Hardy, Head of FX Strategy at Saxo, notes that expectations for an interest rate hike is cooling the market. “The situation could unwind violently,” he says. Rates are at a record low of 0.5 percent in the UK, but markets expect a hike in the coming months, which could hit homeowners. OECD figures reveal British homes are overvalued by 30 percent compared to rents and household income.

New Zealand

Prices in New Zealand are even more inflated - 70 percent overvalued compared to rents and 32 percent ahead of earnings, according to the OECD. The IMF puts the figure at 80 percent for rents compared to their historic average. New Zealand was one of several smaller economies that adopted very low interest rates in the wake of the financial crisis. Low rates exacerbate credit bubbles and as Hardy says, at the centre of these is a housing bubble.

Rates have been hiked four times this year and while the RBNZ says it will take a breather, the only way is up on the path to normalisation. House prices in New Zealand have doubled in the last decade and the mortgage bubble has risen from NZD $70 billion in 2002 to NZD $186 billion in 2013 – a 165 percent rise.

Canada

Arguably the most dangerous bubble is in Canada, where prices appear seriously frothy. IMF figures show price-to-rent ratios are 86 percent above their historic averages - the most on the planet. Meanwhile average Canadian prices are now 66 percent above those in the US after tracking closely right up until the crash, when US values plunged. Rates remain at one per cent and could even go lower, which may only make the bubble bigger before it all unwinds.

Norway

Norway has also been operating low interest rates and has seen a big surge in property values, with prices twice what they were ten years ago. It’s number three on the IMF’s chart, with prices overvalued by almost 70 percent. The OECD says average house values are now 22 percent above incomes. Rates are at 1.5 percent and the central bank has no plans to hike until summer 2015.

Nobel laureate Robert Shiller warned as long ago as 2012 that Norway’s housing market was in a bubble and record low rates that fuelled a borrowing spree have made things worse. Prices did fall six percent in the last seven months of 2013, but a return to growth prompted a dire warning from the head of Norway’s financial regulator earlier this year.

Sweden

The country’s central bank surprised markets with a hike to rates this year but the housing sector looks vulnerable. Lack of supply and low interest rates have forced up prices and now Swedes are grappling with private household debt that is 170 percent of disposable income. IMF figures show Sweden has a price-to-rent ratio more than 30 percent above historic averages. Apartment prices have tripled in ten years, while house prices have doubled, which Economics Nobel Prize winner Paul Krugman said earlier this year is a sure sign of a potentially nasty property bubble.




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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.