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Jul 15, 2004
Global: Global Housing Round-Up (Part II)
Stephen Roach
As always, there are major cross-currents at work in global asset markets. That's very much the case in assessing the current state of play in global property markets. In an effort to assess conditions in property markets around the world, we recently gathered input from Morgan Stanley's far-flung team of global economists. While far from all-inclusive, this round-up of some 23 dispatches from around the world provides a good representation of recent trends in global property markets; the countries covered account for 94% of world GDP (as measured on a purchasing-power-parity basis) and approximately 96% of the value of the total housing stock in the developed world. For the sake of providing some clarity to these divergent trends, we have organized the commentary into three major groupings — areas where there is clearly a property bubble ("Bubbles"), areas where there is some debate over that possibility ("Bubble Watch"), and areas where there are no signs of any such excesses ("No Bubbles").
Bubbles
Australia (Mal Wood and Hasan Tevfik)
In Australia, the bubble continues largely unabated. House prices were up 15% in 2003 and only little less than that over the 12 months to March 2004 (data still to be released). Anecdotal evidence suggests that prices are down 10-15% from the peak in 4Q03. The P/E for Australian houses — home prices relative to their rental yield — is currently 58x versus a long-term average of 31x and an equity market P/E of 16.5. Housing affordability indices are at the lowest level since 1991 when mortgage rates were 13-15% versus 6-7% now. There is unlikely to be a crash unless we see much tighter monetary policy or a pick-up in unemployment.
United Kingdom (Joachim Fels and Melanie Baker)
UK house prices are up 20% from a year ago on some commonly used indices, and there is hardly any doubt that the market is in bubble territory. On our fundamental model, which uses household disposable income, the number of dwellings per capita as a measure of structural demand/supply measures, and the yield curve as explanatory variables, the UK housing market is some 30% overvalued, more than at the peak of the 1980s boom (see J. Fels, M. Baker: "Putting the Housing Bubble into Perspective," 23 April 2004). Thus, the probability of a correction looks high. However, to get a full-blown bust, the UK economy would have to experience either a recession or aggressive rate hikes, or both. Yet, neither is on the cards, we think, because the Bank of England is well aware of the potential deflationary risks associated with a sharp decline of house prices. Thus, our central case remains a gradual cooling of the UK housing market in response to the past gradual rate hikes, rather than a vertiginous drop.
China (Andy Xie)
In China, the volume of sales of new residential buildings has quadrupled while prices are up some 20% since 1998. Nationwide, it is a volume bubble, reflecting the confluence of a horizontal supply curve, negative real interest rates, and the income bubble associated with surging capital inflow. Shanghai and Beijing account for 14% of national volume; they also account for the biggest overshoot in Chinese property prices.
The bubble is wobbly, as market interest rates are now increasing in China on the back of the government's determined efforts to slow an overheated Chinese economy. What's particularly interesting is that China's domestic monetary tightening has occurred in the face of the coming normalization of Fed policy. This is a potentially lethal combination for China that could have a major impact on the capital inflows that have driven the Chinese property cycle so sharply to the upside. It looks to me as if the China property cycle is on the verge of a major bust.
South Korea (Sharon Lam)
The Korean housing bubble began in mid-2001 when prices started to surge rapidly. Housing prices jumped 10% Y-o-Y in 2001 and another 16% in 2002 but the growth slowed to 6% in 2003. Growth of the housing rent component in the CPI has also been slowing since September 2002. The Korean housing market is cooling down amid the government's continuous anti-speculation policies and a depressed domestic economy. Nevertheless, nationwide housing prices are still 40% higher than the trough in 1998; in the capital city of Seoul, prices have increased by more than 60%. Low interest rates are the main driver in keeping the property sector afloat. The central bank has been keeping its overnight call rate at 3.75% since July 2003, while the inflation rate is currently at 3.6%. Due to prolonged sluggishness in the domestic economy, we expect the central bank to keep its policy interest rate unchanged over the next year, despite the Fed rate hike. The Korean property bubble could therefore be sustained over the short run.
Meanwhile, the government has implemented a series of measures to curb property speculation. However, we warn against the government's plan to foster a rapid increase in housing supply, as it could lead to overbuilding that would prompt prices to drop sharply in the future. We expect to the government to be more effective in controlling the pace of regulations on the property market in order to avoid a hard landing.
Spain (Anna Grimaldi)
The latest data show Spanish house prices up 17%Y-o-Y in 4Q03, after some moderation in the third quarter. House prices in Spain have risen 120% between December 1996 and December 2003, one of the sharpest increases in the OECD countries. In real terms, at the end of 2002, prices were 30% higher than at the 1991 peak. While home prices have increased in a generalized fashion across the country, the increases have been larger in the coastal regions and in small islands. This reflects higher demand for second housing and rising foreign investment. Indeed, investment in Spanish real estate from abroad rose from 0.3% of GDP in 1997 to 1.0% in 2003.
A recent working paper from the Bank of Spain points to rising income and falling nominal interest rates as key explanatory factors. According to this analysis, Spanish house prices stood between 8% and 17% above their long-run equilibrium level in 2002. While a correction is expected, it should not be followed by a major slump; two reasons for this sanguine assessment: first, demand for housing is still growing faster than supply and, second, short-term interest rates should rise only gradually from here.
Netherlands (Annemarieke Christian)
Next to the UK and Spain, the Netherlands has seen some of the sharpest property appreciation in all of Europe. While Dutch house prices reached 20+% growth rates in 1999/2000, they have since cooled down, coming to a standstill in mid-2003. Over the past year, however, the housing market in the Netherlands has picked up slightly again.
South Africa (Riccardo Barbieri Hermitte)
In South Africa, real estate prices are growing at very rapid rates, boosted by increased buying by foreign investors (particularly in the Western Cape region) and, lately, by a cumulative cut of 550 basis points in the Reserve Bank's repo rate over the June to December 2003 period. In the first five months of 2004, Sooth African housing prices rose by an average 24% Y-o-Y. This marks an acceleration from 19.2% growth in 2003 and 15.3% in 2002.
Bubble Watch
United States (Dick Berner)
US home prices rose 7.7% nationwide in the year ended in the first quarter of 2004, but local and regional price changes are becoming more dispersed, pointing to deceleration or declines in what were the most frothy markets or in those with the weakest economic fundamentals. In my view, a few markets (maybe 15 metropolitan areas) are still at risk for declines of around 10-15% as interest rates go up; however, these areas are in most cases where prices have nearly doubled in the past 5 years.
For the first quarter of 2004, home prices declined in six states — Vermont, Alaska, North Dakota, South Dakota, Iowa, and Nebraska; this represents an increase from the fourth quarter of 2003, when no states reported declining home prices. In early 2004, prices declined in thirty-nine of the 220 ranked Metropolitan Statistical Areas (MSAs), compared with only three in the fourth quarter of last year.
Prices rose the most over the past year in the Pacific division — up 12.2% — which is comprised of California, Oregon, Washington, Hawaii, and Alaska. Bubble sleuths should look there for potential trouble. Home prices rose least in the West South Central division — up 3.2% — which is comprised of Arkansas, Louisiana, Texas, and Oklahoma. Most MSAs in California and Florida continue to dominate the Top 20 when ranked using annual price changes.
Home sales and housing activity have yet to be affected by rising interest rates; in fact, home sales surged in May as fence-sitters jumped to buy before rates rose further. We fully expect sales, starts, and prices to cool significantly by year-end.
Canada (Ted Wieseman)
Canada's situation has been similar to the U.S., but with the sharp recent rebound coming off a more pronounced bust in the 1990s. Recent house price gains have been very strong, but this followed an extended period in the 1990s of no growth. As a result, the longer term growth rates are muted. The average existing home sale price was up 12.8% Y-o-Y in May to C$230K. The average price doubled from about C$75K in 1986 to about C$150K at the end of 1989, and then was about unchanged at that level on net through the 90s until the recovery that has set in over the past 4 to 5 years. In real terms, average Canadian home prices didn't surpass the previous peak of 1989 until last year.
France (Eric Chaney)
The French housing market is very buoyant at present, with new housing unit sales up 14% Y-o-Y in 1Q04, new units put on sale up 27%, and inventories down 18%. Second-hand flat and houses prices are up 8% Y-o-Y, with an acceleration to 12% in Paris. In real terms, while property prices are still below their 1991 peak, they will almost certainly go beyond those earlier highs, as the market shows no signs of weakness. However, there are clear signs of overheating on the supply side which, if not corrected, could accelerate prices further and inflate a price bubble in the next two years. Even so, it is probably too early to cry wolf about French house prices.
Sweden (Elga Bartsch)
Swedish property prices are rising at a 6% rate at the moment, which is a notch below the 7.5% average increase in the last decade. Given the additional Riksbank rate cut this spring, the pace might have picked up more recently, along with rising household debt. Like the UK, Swedish homeowners borrow at variable rates and hence could be exposed once interest rates start to rise.
Italy (Vincenzo Guzzo)
Italy is not in bubbly waters, but it has gone through a favorable sustained cycle that stretches back to 1997. House prices on a national average are growing at an annual rate of around 5%, although the top market for the big metropolitan areas of Rome and Milan still sees double-digit gains, at around 12-13%. The cycle kicked in in the mid nineties with the convergence into EMU and the drop in long-term yields. It has accelerated further over the past three years on the back of equity outflows and tax amnesties for repatriation of capital.
Hong Kong (Denise Yam)
Hong Kong's case is probably a bit extreme, due to the SARS crisis last year that took housing prices down an additional 10%. Since the mid-2003 trough, broad residential prices are up 32%, with prices in "popular developments" (large residential estates with highest turnover) jumping 43%. Yet compared to the 1997 peak, housing prices are still down by 55%.
Nevertheless, we've certainly seen renewed signs of a Hong Kong property bubble since early 2004. Completions of newly constructed units have not accelerated because of curbed land supply over the past few years, while increased turnover is concentrated in the secondary market (more than doubling YoY in Jan-Apr 04). Nevertheless, sentiment is already cooling in anticipation of higher interest rates that, because of Hong Kong's currency peg, will be forthcoming in a Fed normalization cycle. The fortunate thing is that the mortgage loan portfolio of Hong Kong's banks has only grown by less than 1% over the past year, after shrinking by 3% from the peak in 2002; at the same time, delinquency ratios have remained low at only around 1%.
Thailand (Daniel Lian)
The asset reflation policy of Thailand's Prime Minister Thaksin Shinawatra, coupled with success in stimulating domestic demand, has ignited a 30-40% recovery in housing prices since 1991. As a result, there is now a small bubble forming in the higher-end luxury sector. However, the lower- and middle-income segments of the Thai housing market are still well supported by genuine demand.
Russia (Riccardo Barbieri Hermitte)
We do not have nationwide data on Russian property prices, but the statistics for Moscow published by the Institute for the Economy in Transition show very strong growth in housing prices during 2003, following a more moderate increase in 2002.
In 2003, the Dec/Dec increase in the average price of apartments in dollar terms was 45.4%. During the same period, the rouble appreciated by 9.25% against the dollar, so the rouble price of an average apartment would have risen by 33.1%. This compares with a 12.0% Dec/Dec inflation rate. The real price of apartments was thus up by nearly 19% in local currency.
Strong economic growth, high oil prices, low dollar interest rates, and increased availability of mortgage financing seem to be the key drivers of the Moscow property market. Given the latest developments in the banking sector, we would expect the property market to cool down somewhat in the second half of this year.
The average price of a Moscow apartment was slightly below US$950 at the end of 2001. It had risen to US$1,600 by end-2003.
Argentina (Luis Arcentales)
Argentine real estate values staged an impressive turnaround in the aftermath of the 2001/2002 economic collapse. While good data on Argentine house prices are not readily available, evidence points at prime residential property already at or even exceeding pre-crisis levels in US$ terms (even after the 60%+ devaluation of Jan. 2002). The recent turnaround comes after housing values declined by as much as 50% by some accounts.
A key driver at work was the decision by the government to freeze all deposits in late 2001 as capital flight reached critical levels. Many depositors — some in very ingenious ways but most of them by fighting court decisions — were able to withdraw their money from banks. Lacking in viable savings instruments, investors diverted their funds into real estate (deposit restrictions were lifted in April 2003). This took place in the context of shattered confidence, macro uncertainty, and essentially no mortgage credit. A second factor boosting real estate values were Argentines who had ample money overseas ($100bn+ by some estimates) and who saw an opportunity to buy real estate at reduced prices. It's hard to say whether a bubble exists or not; however. Given how little progress authorities have made in terms of providing a base for sustainable growth beyond the current bounce, it is unlikely that the sharp property appreciation of late will continue.
No Bubble
Japan (Osamu Tanaka)
By now, Japan must be getting nostalgic for the 1980s — the days of the property bubble. Nationwide housing and land prices are still dropping at 5.7% Y-o-Y as of Jan 1, 2004, but the negative comparison has diminished for the first time in six years. The cumulative drop is now 43.2% relative to the 1991 peak, taking the current level back to prices prevailing in the pre-bubble period. Signs of bottoming out are much clearer in selected urban areas, as 40% of surveyed land price in Tokyo is now either on the rise or flat. Home buyers are now back in central Tokyo, with incremental supply reflecting "fair-price houses" and apartments using land released by restructuring corporations.
Euroland (Eric Chaney)
For the euro area as a whole, aggregate housing prices are well under control. On our estimates (there are no official aggregate data), it is fair to say that house price appreciation is on a 5% trend and still below the peak in the early 1990s in real terms. In the broad sense, there is not a bubble in the Euroland property market.
However, the aggregate picture is still dominated by the long and painful price adjustment in Germany (see Elga Bartsch's comments below) that followed the post-unification bubble; for that reason, it might be misleading to focus only on aggregate pan-regional house prices. That masks some important trends that are evident within the region — namely, clear signs of bubbles in Spain and the Netherlands and the risks of bubbles forming in France, Sweden, and Italy.
Germany (Elga Bartsch)
In Germany, house prices are probably still falling slightly. This continues the trend that has been evident for a decade, ever since the reunification bubble burst in the mid-1990s. At best, home prices could be stabilizing at the moment. But with weak income growth and excess capacity in the construction sector, this conclusion might actually be too optimistic. Unfortunately, there are no good property price data available on a timely basis in Germany.
ASEAN (Daniel Lian)
Singapore: Property prices are still down some 40-50% from the peak in 1996. Since rebounding moderately in 2000, prices have declined a further 15-20%. This has killed confidence, all but ruling out the possibility of a Hong-Kong-style rebound. There is no bubble here in Singapore. Malaysia, Indonesia, and the Philippines: These are all pretty stable markets, with high end housing holding up better than middle housing. There are no serious signs of a bubble in these economies, largely because they are still struggling following the devastation of the Asia Crisis of 1997-98.
India (Chetan Ahya)
After declining by almost 30% in the five year period 1995 to 2000, property prices in India have started looking up. This growth has been driven by low interest rates and the sharp growth in mortgages; in India the outstanding mortgages have grown at a 45-50% compound annual rate over the last 3 years. Yet property price inflation is still relatively benign at around 3-4% per annum. However, the increases in prices have been much sharper in select pockets like Bangalore (where price appreciation has also been triggered by the increased demand from the software and outsourcing boom). On an aggregate basis, however, there is no property bubble in India.
Latin America (Claudia Castro)
Wealth and balance sheet channels via equity and housing are less prominent in most Latin American countries, including Brazil and Mexico. The one exception is Chile, where home ownership is high, financial intermediation is high, and interest rates and inflation are at record lows. Still, while demand for mortgages has increased substantially in Chile, supply also increased, especially in Santiago, and prices did not move substantially. If optimism over the global economy were to be sustained, then we could arguably see a significant increase in housing prices in Chile. In Mexico, low intermediation prevents the development of a true bidders’ market. In Brazil, we saw the sharpest decline in private consumption in a decade last year.
Insofar as Brazil is concerned, even if the high-end housing market appears relatively stable (the data are biased toward large metropolitan areas, notably Sao Paulo), it seems that supply has actually declined for low-end units in recent years. This appears to be a reflection of ongoing pressure on income growth at the low end of the pay scale; this is borne out by soft trends in the rental market, where price increases remain well below inflation. Going forward, our bet is that the cyclical recovery in the Brazilian economy turns out to be stronger than what the markets have been discounting. Even so, the potential rebound in employment and income should not be enough to make up for earlier losses. At the same time, real interest rates could turn supportive; while they remain high at close to 10%, they are as low as they've ever been |
