Now, with property price news from London and Sydney sounding a bit gloomy it might be time.
From 13D Research, June 7, 2018:
A pattern of weakness is becoming apparent in megacity housing markets around the world. By the end of May, home prices in Sidney had fallen 4.7% year-over-year. In Toronto, the average price of a single family home had fallen 13% since the market’s peak in April of last year. Meanwhile, in February, London saw its first annual decrease in prices in more than eight years, which accelerated in March and April. And in the first quarter of this year, Manhattan saw the median price-per-square foot fall 18% year-over-year.
No doubt, these declines can be attributed to region-specific supply and policy factors, whether newly-implemented government restrictions on foreign investment or Brexit and the U.S. tax reform bill. However, a recent report by the IMF sounds a troubling alarm: “a simultaneous decline in house prices across the globe could lead financial and macroeconomic instability.”
The IMF’s argument is intuitive. Accomodative monetary policy following the Global Financial Crisis drove an unprecedented flood of institutional and individual investor capital into real estate, with cross-border flows concentrating in cosmopolitan megacities. This has dramatically divorced megacity property-appreciation rates from economic fundamentals—primarily the spending power of residents. Moreover, it has made local housing markets far more intertwined with global economic conditions. According to the IMF, 30% of property price movements today can be attributed to global—not local—factors, up from just 10% two decades ago.
Now, with QE transitioning to QT, the IMF’s fear is that a reversal of financial conditions could cause cross-border capital to retreat from housing. Given the synchronicity between global megacities, instability could start anywhere and rapidly spread everywhere. The weakness seen today may not be a harbinger of a crisis anytime soon. However, as the lowest interest rates in history begin to normalize, a basic truth, articulated by Fed Chair Jay Powell last summer, requires increasing attention: “Housing is often found at the heart of financial crises”.
Source: The International Monetary Fund
Source: The International Monetary Fund