13 December 2018
This content was correct at the time of publication and is no longer being updated.
The biggest development over the past year in the global housing market has been some price moderation in the top performing countries, which are now the most expensive markets. It is encouraging that these adjustments are mostly due to macroprudential policy measures implemented over the past couple of years, as well as larger supply availability, rather than catalysts such as a sudden drop in demand due to monetary policy overtightening.
In many cases, recent housing market dynamics have been dominated by supply-side restrictions, restrictions on foreign purchases, tax policy changes and stricter lending standards, rather than just by demand weakness.
Some countries vulnerable to downturns
The housing market is one of the key transmission mechanisms between the financial system and the real economy. With such large excesses in housing markets, some countries are vulnerable to significant downturns which might result from an unrelated domestic or external shock, and would be amplified through housing. But in most cases the housing boom tends to be limited to one or a few cities, which could potentially contain the damage.
Over the past year, global house prices have continued rising, and are now marginally above the pre-crisis levels in real terms.
Valuation measures reveal large imbalances
Valuation measures, such as price-to-income and price-to-rent ratios, reveal large imbalances within G-10 countries, with New Zealand, Canada, Australia, Sweden and Norway standing out. These overvalued markets are the places to watch closely, if not for a source of the next recession, then perhaps for a strong mechanism of its transmission.
More worryingly, both ratios in these countries are now well above the pre-crisis levels seen in the US, which is a clear laggard among major developed markets, having gone through boom and bust. Its house price levels just recently exceeded their peaks of 2006.
Sweden and Norway started seeing some moderation in both ratios over the past year. In the US, both ratios have improved significantly since 2011 as house prices started recovering, with price-to-income now at just below its long-term average and price-to-rent already above it.
Supply expansion contributes to cooling
On the supply side, as limited housing availability drove house prices higher, especially in certain cities, investment has been catching up with demand. Most countries have seen sharp pick-ups in residential investment as a percentage of GDP since the crisis.
More recent data, however, points to some moderation in residential investment in a number of countries, including Canada, New Zealand, Norway and Sweden, where expansion in supply is also contributing to the cooling of housing markets. There is a concerning similarity in the pattern of this highly cyclical component of GDP between these countries now and the US before the crisis, though the context is different. On this metric, the US remains well below its pre-crisis levels, while the UK is marginally above.
In some countries, the household debt burden is high and growing, with Australia’s and Norway’s debt-to-income ratios as high as 200 per cent. Household debt burdens have fallen in the US and the UK over the past decade and there has been some deleveraging in the Euro area on aggregate, but this has been mainly driven by Spain, Portugal, Ireland, Germany and smaller countries like the Netherlands and Greece. The debt burden has risen in France and other smaller members such as Belgium.
Whether housing bubbles can be deflated in a controlled manner, or whether this will inevitably lead to ‘popping’ with negative consequences for real economies and financial systems, remains to be seen. But it is a good start.
The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future results.
These materials are provided for information purposes only and are intended only for the person or entity to which it is sent.
These materials do not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities or investment product.
Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. They are valid only as of the date indicated and are subject to change without notice.
This material was created by Fidelity International. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
This content may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organisation that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice personal recommendations based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG, authorised and supervised by the Swiss Financial Market Supervisory Authority FINMA. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German institutional clients issued by FIL Investments International – Niederlassung Frankfurt.
In Hong Kong, this content is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road, Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C. Customer Service Number: 0800-00-9911#2.
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.