House prices have a unique ability to get out of control and distort the economy.
Every city I visit around the world, I hear the same story: Housing is unaffordable. Millennials, even those with good jobs, are struggling to get into the housing market, and they are not the only ones. I also note, with some concern, that sub-prime lending is back.1 Unimaginatively renamed ‘non-prime’, it is not yet at a level which worries central banks, but it is further evidence that global housing markets are hot.
Is another global housing bubble underway?
Consider real house price growth in the G7 economies over the last two cycles (2001-2007 and 2010-2017; see Figure 1). From a macro-economic perspective, it is reassuring: Whilst house prices have risen well above the rate of inflation, in general the scale is much less than prior to the financial crisis.
Two countries have seen higher real house price growth in the current cycle: Germany and Canada. In the latter, there is a potential problem.
Canada has used fiscal policy to stimulate its economy, hit by sluggish U.S. growth and falling oil prices. With interest rates at rock-bottom levels, housing markets and consumer borrowing have surged. Monetary policy is now being tightened, and the currency has jumped to its highest level in two years. These measures could undermine housing values.
Germany is a bit different. Its house prices declined in the previous cycle, so there is an element of catch up. In addition, population growth has been very strong, economic growth robust and fiscal policy is tight. Monetary policy will be expansionary for at least the next 18 months. Despite the recent surge, house prices in Germany look well supported.
Looking more broadly at other G20 countries (see Figure 2), again there has been real house price appreciation, but it does not seem that a pre-Global Financial Crisis boom is taking place.
There may be an issue in the BRICs, though not Russia. Brazil, India and China have all seen strong post-crisis house price growth for three, interrelated reasons:
- Stimulus by China in the wake of the financial crisis boosted emerging markets growth in the period 2008 to 2011.
- Quantitative easing in the developed world between 2011 and 2015 ‘leaked’ into emerging markets, via the carry trade2, boosting liquidity, inflation and asset prices.
- Finally, interest rate cuts in emerging markets, to counter the impact of falling commodity prices from late 2015 to 2017, have also supported house price growth.
Australia should not be regarded as an emerging market, but it has also seen strong house price growth for similar reasons to Canada.
Should we worry about the global economy being undermined by out-of-control housing markets?
Not for the time being:
- House price growth has not been anywhere near as strong a rise as in the period prior to the Great Financial Crisis. Those countries where appreciation has been strong are not a systemic threat to the global economy.
- Central banks will tighten monetary policy very slowly over the next several years, unless there is a strong pick up inflation. At the moment, that does not seem likely.
- Global growth is strong and broadly based, providing fundamental support for incomes and house prices around the world.
Should we worry about lack of housing affordability around the world?
Certainly, we should. It creates political volatility and is impeding the life chances of a whole generation of young people. Real growth in house prices brings the lack of real growth in wages, which we have seen over the last seven years, into sharp focus. So, while there is no bubble looming, we are seeing one of the defining social issues of our time.
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1Nonprime Has a Nice Ring to It”: The Return of the High-Risk Mortgage, Financial Times, August 31, 2017.
2Borrowing in low interest rate countries such as the U.S. to invest in emerging markets with higher interest rates and investment returns.
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