Global Housing Markets Overheating
Government stimulus packages designed to fend off wider economic disaster are actually helping widen housing market inequality, thus perpetuating a vicious cycle.
Such packages that pump cheap money into the economies of developed countries sustain high property and share prices. This underpins homeowners’ borrowing power, guarantees shareholder profits and sustains banks balance sheets — but also simultaneously impoverishes renters and raises the numbers unable to get onto the property ladder.
Many developed countries are seeing house prices rise even whilst coronavirus infection rates rise again. In the second quarter of the year, prices rose in eight out of 10 high- and middle-income countries, with US prices up 5% on a year earlier and Germany’s up 11%, according to Swiss banking giant, UBS. Of the 25 major cities analyzed in its Global Real Estate Bubble Index 2020, over half are at risk of a housing bubble or are overvalued, UBS found.
Toronto was the only major city at risk of a housing bubble, while Vancouver, Los Angeles, San Francisco, and New York were seen as overvalued, but not at risk of a bubble, UBS said. Boston was at fair value, while Chicago was the only city in the region considered to be undervalued.
Europe and Hong Kong face the greatest risk. German cities Munich and Frankfurt, as well as the Polish capital Warsaw, top the list.
Lithuania, Estonia, Poland, Slovakia and Ukraine have all posted double-digit price growth over the past 12 months. Paris, Amsterdam and Zurich are also in bubble risk territory, UBS said.
Other housing markets “overvalued but not at risk of a bubble” include London, Tokyo, Stockholm, Geneva, Tel Aviv, Sydney, and New York. Home values fell in just four of the 25 cities analyzed: Madrid, San Francisco, Dubai, United Arab Emirates, and Hong Kong. The last time there were fewer cities with negative price growth was in 2006.
“Looking ahead, a weak economy, tight credit conditions and the end of these short-term factors supporting demand will hold back growth in house prices next year,” Hansen Lu at Capital Economics in London said, and expects housing prices to stagnate in 2021.
Analysts for global ratings agency Fitch Ratings concluded that Spain will suffer the biggest fall in house prices, down between 8% and 12% in 2020, while Australian prices are expected to lose between 5% to 10%, and the UK up to 7%.
A fall in house prices would dent asset wealth, lower borrowing capacity of homeowners, and could undermine investment in productive parts of the economy. But it would also relieve pressure on those suffering from lower real wages, unemployment and rising rent.