The Global House Price
Slump
In 2008, the crash of the world's
housing markets, which began in the US in 2007, precipitated the world's
most severe economic crisis since the Great Depression.
Inflation-adjusted house prices fell in more than 21 countries out of the
29 for which Q3 figures are available. In no country is there cause for
strong optimism. The latest quarterly figures bring grim news, even in
countries which recently saw price rises.
House prices fell by more than 10% in the UK, the US and Ireland during
the year to end-Q3 2008. House prices also fell in Austria, Japan,
Luxembourg, Israel, Norway, Malta, New Zealand, and Portugal. Although the
latest figures are not yet available, house price falls are also expected
in economic powerhouses such as France, Italy, Germany, South Korea and
Russia.
House price falls in Europe are widely anticipated to worsen, including
those in Estonia, Latvia, Slovenia and Greece.
When house prices are adjusted for inflation, countries with house price
declines include South Africa, Iceland, Indonesia, Finland, Spain, Sweden,
Australia, Canada, the Netherlands , and the Philippines.
Compared to the previous quarter house prices have also fallen in Hong
Kong and Singapore in Q3 2008, which saw strong rises late last year
The core of the crisis
The core of the crisis is the United States, where house prices fell
20.75% during the year to end-Q3 2008 in inflation-adjusted terms
according to the Case-Shiller house price index. This was after a 6.62%
fall during the same period last year. Prices in many regions, such as
Arizona, Nevada, California and Florida, have fallen much more.
In the United Kingdom, house prices fell 14.44% during the year to end-Q3
2008 in inflation-adjusted terms, after rising 7.59% during the same
period last year.
House price falls in the UK seem to be accelerating. The figures show
house price declines of 6.67 % (inflation-adjusted) during the latest
quarter in the UK. This is the largest quarterly fall among the countries
where data is available.
Ireland saw its second year of falling house prices, with a decline of
13.74 % in inflation-adjusted terms, after a 6.38% fall last year.
House prices were significantly up on the year to end-Q3 in Slovakia and
Bulgaria. But in each case, prices were stagnant or fell slightly during
the latest quarter, in inflation-adjusted terms.
Synchronized housing markets
The entire world’s property markets now move in a synchronized manner,
highly affected by the US economy and US interest rates. This is the
culmination of a process which began in 1971, with the end of the Bretton
Woods fixed exchange rate system.
The global housing slump comes on the heels of a decade-long house price
boom, unprecedented in terms of synchronicity and magnitude, caused mainly
by loose monetary conditions. Now that global credit markets are frozen,
housing markets around the world are suffering.
Housing markets around the world can broadly be classified into two: 1)
those where house price falls led to economic recession and 2) those where
the global economic slowdown led to house price falls. The first group
include countries such as the US, the UK, Ireland, Spain and Estonia.
These countries suffered from excessive house price bubbles which
triggered the global credit crunch and a financial meltdown.
Housing markets in the second group, on the other hand, have stronger
economic and financial market fundamentals. Their economies and housing
markets suffered mainly from contagion and the confidence crisis which
have afflicted almost all housing markets. These countries include Canada,
the Netherlands, and Norway.
Nevertheless, there are several countries which cannot be classified into
the two groups above. There are countries with structural problems in
their economy, the housing markets and/or the financial system, making
them vulnerable to external economic shocks. These problems were magnified
with the global financial meltdown. They include Japan, South Korea and
Germany.
Interest rates
In response to the crisis, central banks have been rushing to drop
interest rates:
On October 29, the US Federal Reserve dropped rates to 1%, the latest in a
series of cuts which have reduced rates from 5.25% in September 2007;
On October 31, Japan cut its interest rates for the first time in seven
years, to 0.3%;
On November 25, the People’s Bank of China cut its main borrowing rate
by 1.08pc points to 5.58%, its fourth interest-rate cut in 10 weeks;
On December 2, the Reserve Bank of Australia cut its cash rate to 4.25%,
its fourth cut in four months;
On December 4, the European Central Bank, the Bank of England, Sweden’s
Ricksbank, and the Reserve Bank of New Zealand all slashed their interest
rates – to 2.5%, 2%, 2% and 5% respectively;
On December 6, the Reserve Bank of India cut interest rates for the third
time in less than two months, bringing its repo rate down to 6.5% from
7.5%.
In addition, very significant fiscal stimuli are planned for the US, UK,
China and several Eurozone countries.
Forecasts for 2009
The Global Property Guide expects 2009 to be a deeply unpleasant year.
Research shows that house prices are most affected by three influences:
economic growth, momentum, and interest rates. Unfortunately, all these 3
influences are moving in the same direction – downward.
• Economic growth. The deep recession now beginning will have strongly
negative effects on house prices. Not only do people have less disposable
income, but the uncertainties are pushing them to raise their saving rates
– leaving less money available for spending on houses.
• Expectations and price momentum are strongly down in many major
markets. People tend to derive their impression of what is likely to
happen to house prices, from neighbours and from the news, and the news is
bad. This increases the likelihood that things will, actually, get worse,
on the (well-established) basis that one of the strongest predictors of
property price movements in Period T, is what happened to property prices
in Period T-1.
• Interest rates. Base rates have been reduced, but mortgage lending
rates have not fallen. The UK is typical here. Banks and building
societies are refusing to lower mortgage interest rates, despite the Bank
of England’s base rate cuts.
The two areas where the Global Property Guide is most optimistic about are
Latin America and the Middle East, because gross rental yields in both
these regions are still high. Yet because both regions are highly
dependent on commodity sales (which suffer in recessions) even here,
caution is required.
Regional
forecasts:
EUROPE
The Global Property Guide continues to be very negative on Europe, almost
in its entirety, with the exception of Macedonia (where yields are good),
and possibly Moldova. The feels the continent is entering a longish period
of downward house price adjustment.
Price/rent ratios need to fall significantly before a recovery in prices
takes place in Europe.
The Global Property Guide expects strong price declines to continue in the
UK, Ireland, and Spain. Recovery for much of EU will depend upon the
effectiveness of the planned €200 billion stimulus package.
The UK is expected to go into recession in 2009, with an economic
contraction of 1.5%. However house prices may bottom in 2010, the big hope
being that construction spending for the 2012 London Olympics may help
propel the economy and the housing market to recovery.
Among developed economies in Europe, house prices rose most in Ireland and
Spain. In turn, these two countries have also been among the worst
affected by the global house price slump. Housing gluts in Madrid and in
coastal areas of Spain continue to pile up. Ireland is expected to
stagnate longer as the government is focusing more on balancing the
budget, than on stimulating the economy.
The Global Property Guide expects growth throughout Eastern Europe to be
impacted by the recession in developed countries in Europe. There are two
islands of good value in Eastern Europe. In Chisinau, Moldova, apartments
can return high rental yields , in the mid-teens. However, the risks are
high.
A more likely prospect for most buyers is Macedonia, which has been
enjoying a house price boom, thanks to a stronger economy and a more
stable political environment. Gross rental yields in the capital, Skopje,
are around 10%.
ASIA
Prices fell in most of Asia in the second half of 2008, because of
inflation, interest rate increases, and contagion from the financial
crisis. The Global Property Guide believes that the downward trend will
continue in 2009.
In China, the post-Olympic slump has added to the overall economic
slowdown. Plummeting sales figures are reported, although official and
unofficial statistics provide conflicting views.
In Shanghai, newspapers report huge discounts. However, figures from e-homeday
still show an impressive 24% y-o-y house price increase from a year
earlier. We believe that house prices will continue to fall, as rental
yields in China are moderate, according to Global Property Guide research.
Japan and South Korea are both quite dependent on electronic and
automobile exports to Europe and America, and their economies are now in
recession. The situation is expected to deteriorate in 2009, and house
prices expected to fall further.
In Hong Kong and Singapore, finance-related job cuts are following the
collapse of major US and European financial institutions. Local demand is
also likely to weaken as exports fall. Dwelling price falls are expected.
In the Philippines, the real estate boom at the top-end of the market was
financed by Overseas Filipinos, mainly those in the US, Europe and Japan,
now in recession. A significant amount of new supply is expected to be
completed in 2009, which may lead to overhang and more price falls.
In Vietnam, Cambodia and Indonesia, a construction boom financed by South
Korean firms has abruptly stopped as South Korea enters recession. The
South Korean won is Asia’s worst performing currency, and Korean firms
have been asked to pull out their foreign investments. Risky real estate
investments in Southeast Asia have been among the first to be withdrawn.
These countries are also prone to be affected by the global economic
slowdown.
In Thailand and Malaysia, political problems are pre-occupying
governments. Although the situation in Bangkok is much worse than in Kuala
Lumpur, the political uncertainty has frozen the housing markets in both
countries (and will continue to keep housing markets frozen for some
time).
In India, the recent attacks in Mumbai will muddle the situation for some
time but housing markets will definitely suffer. The overall economic
slowdown it likely to hurt luxury house prices in several other key
cities, such as Bangalore and Chennai.
US AND CANADA
House prices in the US are likely to fall further until end-2010 or
mid-2011. Coastal states with huge housing overhang such as Florida and
California are likely to experience the most prolonged house price slump.
The housing market’s recovery will depend a lot on the effectiveness of
the government of the incoming president Barack Obama in dealing with the
crisis.
Canada‘s economy is in better shape than that of the US, but is still
expected to fall into recession from Q4 2008 to Q1 2009, due to financial
market turmoil, declining exports and weaker commodity prices. Nominal
house prices are expected to start falling in Q4 2008, and to continue
falling until 2010.
The previously hot markets of Western Canada, including Calgary, Edmonton
and Vancouver, will experience the largest drop in sales and house prices
in 2009.
PACIFIC
Both Australia nor New Zealand are likely to see house price declines in
2009. Both countries have had significant house price booms, so that
houses are now on relatively low yields.
MIDDLE EAST AND AFRICA
Dubai is a great idea, superbly executed and publicized. But four factors
militate against it just now:
• Gross rental yields have already fallen from 10% to 5% over the past
18 months, according to Global Property Guide research. Dubai property was
undervalued 18 months ago, in fundamental terms. No longer.
• Many Dubai residents have lost a lot of money in the Indian or
regional stock market crashes, or are feeling poorer as a result of the
oil price falls.
• The luxury segment demand from Europe and America has been severely
affected by the global credit crunch and the economic slowdown.
• Dubai is a trading centre, and will be impacted by the global
downturn.
Dubai is a front-runner: whatever Dubai does, other countries in the Gulf
will likely emulate. However, we believe that Abu Dhabi, Kuwait, and Saudi
Arabia are in a much stronger position, as there are severe housing
shortages in all these locations.
Yields also continue to be spectacular in parts of Cairo, Egypt (12% in
Maadi), strong inAmman, Jordan (around 8.5%) and in Morocco(Marrakesh
apartments yield around 7%). The Guide believes these Middle East housing
markets are relatively secure, for the moment.
Global Property Guide recommends investment in Cairo, Egypt although
foreigners may encounter some difficulty acquiring property.
LATIN AMERICA
Many Latin American countries are significantly less expensive than 3
months ago, due to currency declines - Mexico, Brazil, Chile, Uruguay, and
Colombia, particularly. There have been more moderate currency declines in
Peru, Argentina, and Guatemala.
The danger is that Latin America’s strong economic performance may have
been an end-of-cycle growth spike. Yet yields are excellent in many Latin
American countries, such as Panama, Peru, Uruguay and Argentina. This is
still a good opportunity to buy.
Panama is widely believed to be overbuilt, a mini-Dubai in the making. But
Panama’s gross rental yields average 10.6% (inland apartments) and 9.9%
(beachfront apartments), according to Global Property Guide research. When
property is producing such good returns, it rarely happens that investors
completely desert a market.
Argentina’s capital Buenos Aires has very high rental yields, ranging
from 8% to 10.75%, but a fiscally irresponsible government.
Peru’s capital Lima enjoys spectacular yields of 10%-12% in prime areas
such as Barranco, Chorrillos, La Molina, Miraflores, San Isidro, and
Santagio de Surco. It has also experienced 3 years of strong economic
growth, with annual GDP growth rates nearing 10%. The government has
become increasingly unpopular, however, which is dangerous.
Uruguay’s capital Montevideo enjoys high average gross rental yields of
7.8% for apartments, and 8.9% for houses, according to the latest Global
Property Guide research. There was a 13% rise in the average price of
apartments in Montevideo in 2007, according to the Buenos Aires research
house Reporte Inmobiliario. More rises in value are likely.
Colombia’s yields are quite good (average gross rental yield of 7.62% in
upscale districts of Bogota). Yields in Brazil’s Rio and Sao Paolo are
good, but not spectacular
In summary, Uruguay, Panama, Peru, and Colombia continue to be
recommendable.
CARIBBEAN
The Caribbean seems likely to take a pause this year, as demand for
high-end Caribbean high-end housing is mostly in the hands of US buyers,
who are most affected by the housing crisis and the stock market fallout.
- 2008 December 14 MENAFN
Path to Prosperity
Here's an annual international report card that
once again ranks Canada, against exceptionally stiff competition, near the
top of the class.
On a scale of 1 to 10, Canada earns a grade of
8.1 in this year's Economic Freedom of the World (EFW) report card,
putting us into a three-way tie for fifth place out of 140 contender
countries - one of our best performances since 1970. We got our lowest
grade (7.1) in 1975, the year in which former Liberal prime minister
Pierre Trudeau imposed wage and price controls.
But the 2007 edition of the EFW report card
makes it clear that Canada is still struggling with one of the course
prerequisites. Judged solely on the size of government (measured by public
sector consumption of GDP and by tax rates), Canada ranks an embarrassing
47th.
The EFW report is compiled and published by the
Cato Institute in the U.S., by the Fraser Institute in Canada and by
another 70 think tanks around the world.
It grades countries on a number of economic and
political attributes - on people's freedom to make personal economic
choices and to engage in cross-border trade, on property rights, on
integrity of a country's currency, on relative size of government. Using
42 separate sets of "data points," assembled from the
statistical resources of the World Bank and the International Monetary
Fund, the EFW concludes that the Top 10 most-free economies are: Hong Kong
(8.9); Singapore (8.8); New Zealand (8.5); Switzerland (8.3); Canada, the
U.S. and the U.K. (all 8.1); Estonia (8.0); Australia (7.9); and Ireland
(7.8).
Germany (7.6) finished in 18th place, Japan
(7.5) in 22nd place and Mexico (7.1) in 44th place. France and Italy (7.0)
tied for 52nd place. India (6.9), in 69th place, predictably scored better
than China (6.3) in 86th place. But China got a higher score than either
of two developing-country competitors.
Brazil (6.0) finished in 101st place; Russia
(5.8) in distant 112th place.
Canada's got its best score, by the way, in the
soundness of its currency, scoring an almost perfect 9.7 - but still
ranked, in this measurement, in 5th place.
Slowly but surely, it appears, the world is
making progress - by extending the freedoms that permit economic progress.
Of the 102 countries measured in the EFW's 1980 report, 90 have increased
their scores. Five countries increased their grade by three full points or
more: Hungary (3 points); Peru (3 points); Uganda (3.2 points); Ghana (3.6
points); and Israel (3.7 points).
Although an academic exercise in statistical
analysis, these grades represent authentic life-and-death realities.
In the 35 countries that rank highest in
economic freedom, average per-capita income is $26,013 (U.S.) a year. In
the 35 countries that rank lowest, it is $3,305.
The average rate of economic growth in the
most-free countries, from 1980 through 2005, was 2.25 per cent a year. In
the least-free countries, it was 0.35 per cent.
In the most-free countries, life expectancy is
78.7 years. In the least-free, it is 56.7 years.
In the most-free and the least-free economies,
poor people earn almost exactly the same percentage of national incomes -
2.5 per cent in the most-free, 2.2 per cent in the least-free. (In this
reference, "poor people" are the poorest 10 per cent of a
country's population.) In dollars and cents, however, the poorest people
in the most-free countries earn $7,334 a year; the poorest people in the
least-free countries earn $905 a year.
In 1980, the average overall score was 5.4. In
2007, it's 6.6. In a companion essay to this year's report, U.S.
economists Russell Sobel and Peter Leeson assert that economic freedom is
indeed contagious - which explains, in part, the rising scores. Economic
freedom, they say, expands and spreads most effectively either through
geographical proximity or through international trade. When one country
expands its economic freedom, they calculate, neighbouring countries
"catch" 20 per cent of it.
And it doesn't matter whether the neighbouring
countries are democratic or not.
Countries can have very little democracy, they
say, and still have substantial economic freedom - citing Hong Kong as an
example. Or they can have a full democracy and severely restrict economic
freedom - citing India and Israel, between 1960 and 1990, as examples. In
the end, they say, economic freedom needs constitutional protection in the
same way that civil liberties need protection from the arbitrary
"rule of the majority."
Throughout the Cold War, the Western democracies
lived in fear that communism would slowly strangle economic and political
freedoms everywhere - causing countries, in U.S. President Dwight
Eisenhower's memorable 1954 phrase, to fall like dominoes. In the end,
these vulnerable freedoms have not only survived but flourished.
Capitalism has proven highly contagious. - GLOBE
& MAIL 2007 September 7
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