Thursday, July 08, 2004

Even more housing bubble news, from today's FT (sub. only).
Evidence so far suggests that housing markets where rates have risen are slowing gently, rather than suffering from panic selling. That is good news for policymakers worried about what a sharp jolt to confidence could do to their over-leveraged economies. Whether this sense of calm persists depends on how high rates are expected to rise.

In Australia, two interest rate rises in quick succession last year appear to have cooled house price inflation in Sydney and Melbourne, its two biggest cities.

In the UK, the first quarter of the year saw feverish price rises, especially in the less affluent north of England. But after a rise of 100 basis points in interest rates since November, and especially following Mr King's warnings, many estate agents report slackening home sales and falling asking prices. Mortgage lenders have also seen signs of a slowdown in June. The evidence in Britain to say this is the long-awaited correction, however, is still inconclusive - indicators of activity have fluctuated wildly for several years and there have been several false peaks.

Most recently, the US's quarter-point rate rise last week to 1.25 per cent was the first in four years. But the expectation of higher rates had led to a flurry of homebuying in the first half of the year to catch the best mortgage deals before borrowing costs rose. In New York, one of the hottest markets, the average price of a Manhattan apartment touched almost Dollars 1m this spring.

Given the pace of global house price growth recently, few would dispute that properties in many countries are to some extent overvalued. In a recent research paper, Goldman Sachs, the investment bank, warned that the US, UK and Australian housing markets were overvalued by 10, 15 and 29 per cent respectively, after prices had risen by 37, 96 and 82 per cent in real terms since the mid-1990s. It said all three markets were at risk from higher rates. . . .

Globally, the ratios of house price to income are at their highest levels since the previous housing market boom turned to bust in the late 1980s.
Australia may be a harbinger of things to come for the US and UK. Down Under, two quick interest rate hikes last year took the bloom right off the rose of Sydney's and Melbourne's housing markets. The Australian Bureau of Statistics says housing prices rose just 2.5% nationally in 2004:I, but a more valuable statistic is surely Australian Property Monitors' finding that home prices in March fell 7.5% in Sydney and 12.9% in Melbourne.

The Economist chimes in on Australia as well this week.
Australian Property Monitors, which are more timely because they are based on prices when contracts are signed rather than at settlement, suggest that home prices tumbled by an average of 8% in Sydney and by 13% in Melbourne in the first quarter. Anecdotal evidence suggests that the slide has continued since then. Last weekend in Sydney only one-third of properties put up for auction�the most common method of sale in Australia�were sold, signalling that prices have farther to fall.

. . . the main reason for the falls in Sydney and Melbourne seems to be that first-time buyers have been priced out of the market, while demand from buy-to-let investors has dried up as net rental yields have fallen below mortgage rates. This holds lessons for Britain, where the number of first-timers has also slumped and buying-to-let is looking less profitable.

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