The Housing Markets Most At Risk Of Crashing Down Around You

The Housing Markets Most At Risk Of Crashing Down Around You
Reda Farran, CFA

over 1 year ago2 mins

It’s no secret that Covid turbocharged the global housing market: homeowners – flush with cash from government support programs – had more dough to spend and lower mortgage rates to pay as central banks slashed interest rates, while the new normal sent homebuyers on the hunt for bigger spaces. Now, though, rising interest rates and red-hot inflation have made homes less affordable, putting a few individual markets at particular risk of a correction.

Helping us assess which ones are most vulnerable is a handy scoreboard by Bloomberg Economics that combines five gauges of property risk: the house price-to-rent and price-to-income ratios judge sustainability and affordability, house price growth (in real and nominal terms) measures price momentum, and credit growth assesses risk. Excess growth in household credit, after all, can be a sign of trouble ahead – just like it was before the subprime mortgage crisis.

Bloomberg calculates an overall score for each country by averaging each of its five ratios’ “z-scores” – a measure of how far a country’s ratio is from the mean. The countries that come out with the bubbliest housing markets – making them particularly susceptible to big corrections – are New Zealand, Czech Republic, Australia, Canada, and Portugal.

But the analysis also shows that the frothiness is pretty widespread: 19 OECD countries have price-to-rent and home price-to-income ratios that combined are higher today than they were ahead of the 2008 financial crisis – an indication that prices have moved out of line with fundamentals and are becoming unsustainable. What’s more, the IMF global house price index – which covers 57 countries – is well above its peak in 2008.

Global house prices are at a record high. Source: Bloomberg
Global house prices are at a record high. Source: Bloomberg

A bursting of the global housing bubble would hit the global economy in a few ways. First, a sharp decline in house prices could significantly reduce wealth and lead to a contraction in consumer spending. Second, a stagnation or slump in property construction and sales would directly hit global growth, since these activities are huge multipliers of economic activity around the world. And third, a declining property market would hit bank lending as the risk of bad loans increases, choking the flow of credit that economies thrive on. And while these risks are serious for every country, they’re even riskier for those that top Bloomberg’s scoreboard…

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