IMF's most overvalued housing markets around the world

Era of Benign Neglect of House Price Booms is Over

Theory asserts that house prices, rents, and incomes should move in tandem over the long run. If house prices and rents get way out of line, people would switch between buying and renting, eventually bringing the two in alignment. Similarly, in the long run, the price of houses cannot stray too far from people’s ability to afford them––that is, from their income. The ratios of house prices to rents and incomes are thus often used as an initial check on whether house prices are out of line with economic fundamentals. 

Hence we also need macroprudential policies aimed at increasing the resilience of the system as a whole. The main macroprudential tools used to contain housing booms are limits on loan-to-value (LTV) ratios and debt-to-income (DTI) ratios and sectoral capital requirements (Figure 4). Hong Kong SAR has imposed caps on loan-to-value and debt-to-income ratios since 1990s, Korea since 2000s, and during and after the global financial crisis, over 20 advanced and emerging economies have followed their example.

Another macroprudential tool is to impose stricter capital requirements on loans to a specific sector such as real estate. This forces banks to hold more capital against these loans, discouraging heavy exposure to the sector. In many advanced economies—Ireland, Norway, and Spain— and emerging market economies— Estonia, Peru, and Thailand— capital adequacy risk weights were increased on mortgage loans with high loan to value ratios.

IMF have posted several graphs. (Yes, they let a graphic artist go a bit wild with them…)

According to the blog, Belgium is an exception to being in trouble, despite the higher than average price to income and rent. That leaves Canada as the most troubled country on both measures with New Zealand and Australia not far behind. Also flirting with a worrisome bubble are France, UK, Sweden, Norway.

IMF have also launched a new site to pull together all their data on world housing markets.

IMF's New Global House Price Watch

Gravity is making itself felt on property prices worldwide

Gravity has taken hold of property markets around the world. And this is still under the effects of unusually low interest rates.

Searching for Solid Ground

AFTER years of dizzying ascents, a big dose of gravity has hit residential-property markets around the world. According to The Economist’s latest round-up, year-on-year prices are now falling in 12 of the 21 countries we track; in five of the other nine, prices are rising at a slower rate than they were a year ago.

The standouts on overvalued:
Hong Kong 64%
Canada 54%
New Zealand 44%
Belgium 55%
Singapore 58%
France 43%
Australia 36%

Even places like Sweden and Netherlands at 25% overvalued have some pain coming before they reach ground level. And Spain still has nearly that far to go despite already falling 22%.

What Markets are Above Fair Value? DB Report

A chart from Alan Ruskin at Deutsche Bank showing the countries that having housing markets that still have not adjusted to fair value by the usual measures of price to income and price to rent ratios.

For the text record the worst remaining un-busted housing markets are:
Belgium
Canada and Norway in a close tie for second
France Australia vying for fourth
NZ and Netherlands
UK
Spain
Finland (overvalued strictly on Price to rent)
Denmark
Italy (overvalued mostly on Price to income)

Of housing booms and busts

The problem for the likes of Spain, the UK, Denmark and NZ, is that even after the adjustment, these markets are still substantially overvalued at least by these widely used metrics. The Spanish data would tend to point to an adjustment in these ratios by a further 25% before fair value is reached – presumably mostly through house price adjustments. This is before any overshooting, related to constrained policy, is considered.

The only thing that could save the Spanish banks at this point given the extreme pain from the small correction so far is polar melt causing the gulf stream to shut off precipitating a mass migration. (How's that for a doomer angle on it?)

Hat tip: VREAA

New Zealand Points at Canada's Bubble

The Kiwis (who are in the midst of a massive housing bubble) would like to point out that the Canadians are in the midst of a massive housing bubble. Neville Bennett is worried a major housing bubble in Canada may cause international distress

I think Canada is in for a terrible fall because it is gripped with a manic fervour for real estate.

Funny the clarity of an outsider. Watching the bidding wars and line ups in Toronto reminds me that bubbles don't end without a) bold intervention (see China) or b) having already sucked in every last possible participant. The explosion won't burn out until it runs out of fuel. Only this explosion doesn't leave behind ash, but debt.

Canada has weakened lending criteria too much. Private debt is huge in NZ and Canada (about 150% of GDP). This degree of debt lowers credit worthiness. Standard and Poors have revised NZ’s Banking Industry Country Risk form Group 2 to Group 3 (with Italy, the US and UK). Private debt also lowers consumption and deepens recessions.

CMHC seems to be highly geared: it had only $11 bln of assets in 2000, and most of its assets now are MBS insured by itself. It seems as leveraged as Fannie Mae which had US$2.3 trillion in guarantees backed by a mere $44 bln in assets as it folded. CMHC is very vulnerable to a small fall in house prices.

Consumer confidence rises when house prices rise. Consumers borrow to expand their spending. In less than 10 years, consumer spending has risen from 58% to 65% of Canadian GDP.

In 2011 homes became ATM’s, and the average homeowner had only 34% equity in their home, a fall from 55% only 4 years ago. Meanwhile, Canadians owed $1.53 for every dollar they brought home. Canadians have pulled $220 bln out of their homes in revolving home equity lines of credit (HELOCs): on a per capita basis, this is about three times as much as the Americans borrowed at the peak of their boom.

I could keep quoting. But I do want to note problems with the graph he cites from trendlines.ca. The graph compares home price to family income. But it does not adjust for the accelerating income gap in the 2000s that left the middle class with less income relative to inflation. Not more. The US market is still overvalued, not undervalued as that graph shows.

Hat Tip: Epte at VREAA

Bubble in New Zealand Hits New Highs

Property sales in Feb up 37% Year on Year
Listings up 8% Year on Year.
Property asking prices in New Zealand reach record levels

The seasonally adjusted truncated mean asking price for listings in March rose again to a new record level of $429,865 up $3,300 from February. This pushes the asking price up to another new high. The trend in the last three years very clearly shows an accelerating growth in asking price over the recent 12 months as compared to 2010/2011. ‘Eagerness to buy matched to availability of attractive financial support is however not being met with a consistent and sufficient supply of new listings. This scenario continues to drive this sellers’ market, where it is clear those homeowners who are putting their property on the market are expecting to see a higher sale price as flagged by the new record level of asking price in March,’ says the report published by Realestate.co.nz.

New Zealand Nibbles Away at Edge of Consumer Debt Bubble

New loan shark laws unveiled

Among the proposed changes, the bill would make it illegal to lend someone money whose loan repayments would be likely to result in substantial hardship.

The legislation would also require complete disclosure of loan terms and extending the period during which borrowers can cancel their loan.

"These will be the biggest changes to consumer credit law in a decade. It is time for a significant shift in lending laws to increase protection for borrowers and target irresponsible lenders," Tremain said.

Given the massive increase in household debt there are a lot of potential prey for lenders.

Household debt New Zealand
http://www.rbnz.govt.nz/keygraphs/fig5.html

Strangely Familiar Story in New Zealand

School Boosts Home Values in an Auckland Neighborhood

The suburb, a real estate agent said, is popular with the wealthy Asian immigrants who have been coming to New Zealand in increasing numbers in recent years, and particularly with the Chinese.

Last December, Mr. Fong sold a luxurious, five-bedroom house in Epsom to a buyer from China. The residence, which was bought for 2.56 million New Zealand dollars, or about $2 million, covers 448 square meters, or about 4,800 square feet, on a 937-square-meter lot. It is larger than most properties in Epsom, but there are other homes of similar size.

Also, larger properties are considered more of a security risk, because neighbors are not nearby.

“The more privacy you have — for instance, if you’ve got trees all around and no one can see you — at the same time, it’s easier to get a burglar as well,” he said, explaining that a wife and children will often settle in New Zealand for schooling purposes while the husband is still working overseas, so security is important.

Ehem.

OECD and Deutsche Bank Rank the Most Overvalued Countries

The Most Overpriced Housing Markets In The Developed World
Country - Over valued by:
Italy - 10%
Denmark - 17%
Finland - 22%
Sweden - 25%
Spain - 33%
UK - 34%
Netherlands - 36%
Australia - 39%
France - 42%
New Zealand - 44%
Norway - 48%
Canada - 54%
Belgium - 56%

I don't actually agree with this analysis that the U.S. is 9% undervalued. I would have put it at 7-8% overvalued. But given the wide differences between markets, it probably comes down to the weightings. For example, because Las Vegas and Arizona overbuilt without regard to lower population, many of those houses simply shouldn't count in the analysis. Also, if they are using average incomes, that completely ignores that most of the gains in the last decade went to the top few percent and isn't available to the middle class at large to invest. But this isn't about places finding a bottom. It's about those that are doing an excellent impression of Wile E Coyote.

Dealing with an Industry that Lives on Transaction Fees

A minor case, involving fairly low amounts of money, but a reminder that when you are dealing with people who get paid to make you sign, and get nothing if you don't, you must treat them as a hostile party. Yes, you must pay more to protect yourself; you must hire your own counsel, your own inspector, and even then if you have any questions, hire another to review that one's work. Start from a position of pessimism and distrust. Especially in a bubble, buyers get starry-eyed and they are such easy targets, and there is so much money to be made on the extra churn it attracts additional shady operators, so your odds of finding a trustworthy one get lower and lower.

If you feel pressure. Walk away.

Real estate penalty a joke, say thwarted pair

The advertisement said relocatable houses were permitted on the sections.

They bought one of the sections with the intention of putting a relocated house on it and using it as a holiday home.

Mr and Mrs Wild said they twice asked Ken Adam, owner and branch manager of Perpetual Real Estate's Te Anau and Manapouri Fiordland branch, if there were any restrictions on the sale. Mr Adam told them both times there were no restrictions, they said.

However, after they purchased the section they found out a covenant was in place prohibiting secondhand transportable homes from being put on the section.
. . .
He admitted there had been an oversight in the newspaper advertisement's wording.

It was also an oversight that the Wilds' contract did not feature the covenant saying no relocatable houses were permitted on the section.

Checking in on New Zealand's Bubble

Hope springs eternal.

New Zealand's long-term average is 78,000 property sales a year, but sales "dropped like a stone" from 100,000 to 50,000 after the market peaked in 2007.

Helm said the release of KiwiSaver funds was providing some buying stimulus, but the main reasons for the demand were continuing low interest rates and a return to 95 per cent bank mortgages.

"Since we bribed the market, it will stay afloat a little longer."

The Kiwisaver referred to here is a scheme where withdrawals from a work-based savings program can be subsidized up to $5,000 toward a first home purchase. And better yet, multiple parties with multiple subsidies can pool together on the purchase.

"Certainly there are hot spots around the country but that doesn't mean the market's overly buoyant or getting inflated and I think the Reserve Bank will be pleased to sense that is happening, because they must be worried about these low interest rates."

Nothing to see here. Go about your business.

"Back then 6 per cent of the housing stock turned over in a year and now it's 3.6 per cent.
"Whether that's a structural change or just a reflection of a really slow climb back after two recessions, only time will tell."

I really like how they've stretched the graph out sideways to make it look like a *doubling* in the index over five years is just a gentle rise. This is an index, inflation has been removed. Indexes typically should be flat, barring a structural change.

Related links:

BNZ Guidance On EUR500 Million 2015 Covered Bond, Swaps +1.25 Area
Pricier than expected
Fitch puts Australia banks on review for possible downgrade over funding costs

Q+A-Will a big exposure to mortgages hurt Australian banks?

Mortgages drive overall loan growth at National Australia Bank (NAB.AX), Commonwealth Bank of Australia (CBA.AX), Westpac (WBC.AX) and Australia and New Zealand Banking Group (ANZ.AX).

Between them, they have lent A$1.1 trillion worth of home loans, the equivalent of 60 percent of their loan books. This compares with about 15 percent among U.S. and UK banks, but that is an understated exposure as it excludes securitised mortgages.

Economist Warns More Housing Markets Have Turned

UPDATE: Original Economist Blog Post is here

Based on the average of the two measures, home prices are overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden (see table). Indeed, in the first four of those countries housing looks more overvalued than it was in America at the peak of its bubble.

Warning of plunge in house prices

''The latest global house price indicators are now falling in eight of the 16 countries surveyed by the magazine, compared with five countries in late 2010,'' the magazine said.
Using price-to-income ratios - a gauge of affordability - and price-to-rent ratios, The Economist said home prices were overvalued by 25 per cent or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden.

Charts below are from here
Ireland and the U.S. are approaching a normal market (where affordability is at long-term historic norms), so they are included as a metric. Britain and Spain are still adjusting. Australia, despite the year and a half of decline, is still second only to Hong Kong (and South Africa, which is not shown) in being over priced.

Looking at prices relative to rent, which adjusts for pure demand for shelter, the chart shifts around. France pulls into the lead for most overpriced, and New Zealand, Canada join Hong Kong.

That could be exacerbated by a looming credit crunch, the magazine said.

But the analysis did not account for local supply and demand factors, the Real Estate Institute of Victoria said.

REIV is delusional. Those buyers aren't paying with local cash. A global credit crunch does not have to abide underlying demand. Buyer will can't be expressed as high prices if the creditors pull back.