EM housing markets risk financial stress from rate hikes: Oxford Economics

EM housing markets risk financial stress from rate hikes: Oxford Economics

Michelle Zhu
06/09/18, 12:18 pm

SINGAPORE (Sept 6): While real house price growth remains positive on the global front, it has nonetheless slowed and there are rising risks from price declines in highly-valued markets and some emerging markets (EMs), says Oxford Economics.

According to the research house’s world price index, real or inflation-adjusted growth has fallen from 4% in mid-2017 to 2.7% in 2Q18, which is slightly above long-term average levels since 1997 and therefore relatively solid and still supportive of the global upturn.

But trends across economies remain extremely varied.  

In a Wednesday report, lead economist Adam Slater notes that price growth has remained “solidly positive” in key global economies such as the US, China and India – albeit lower than they were a year ago.

On the other hand, house price growth has proven rapid in Hong Kong at 15% y-o-y , followed by the Netherlands (7%) and Mexico, Spain, Thailand and Germany which are all at around 5%.

Slater also highlights a number of markets with falling prices, Sweden being the most striking at -7% y-o-y, while real prices remain broadly stagnant in the UK, South Korea and Australia.

In the economist’s view, there are some signs that high valuations could now be weighing on price growth in some economies, as several years of strong real-terms growth have left aggregate valuations in the OECD (Organisation for Economic Co-operation and Development) relatively high at around 7% above the long-term average.

Valuations in the US and German are currently not excessive while Japan looks cheap, says Slater. On the other hand, he believes extreme valuations appear to be centred in a group of small-to-medium sized economies such as Norway and Canada, while valuations are also looking high in UK, France and the Netherlands.

Looking ahead, Slater sees risks in economies with high valuations and high house price growth such as in New Zealand, Ireland and Hong Kong, the last of which has seen its price-rent ratio double since 2008.

There is also a risk that financial stress and rising local interest rates could hit emerging market (EM) economies – particularly Turkey, Russia, South Africa and Brazil where price growth is already weak.  

“If we compare valuations to real price growth, we can see a negative relationship: price growth looks weakest in highly valued markets. It is likely that high valuations plus tighter monetary conditions have played a key role in the sharp slowdown in price growth in the UK, Australia, Canada and Sweden in the last year,” Slater adds. 

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