Global House Prices Searching for Solid Ground the Economist
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Aug 18th 2012 | from the print edition
Global house prices
Searching for solid ground
An era of frothiness is over
AFTER years of dizzying ascents, a big dose of gravity has hit residential-property
markets around the world. According to The Economist’s latest round-up, year-on-year
prices are now falling in 12 of the 21 countries we track; in five of the other nine, prices
are rising at a slower rate than they were a year ago.
Earthbound prices are returning many markets to “fair value”, defined as the long-run
average ratio of house prices to disposable income and to rents. Housing is now around
or below its fair value in eight countries. But reaching this mark does not mean prices will
stop falling. After dropping by a third from their 2006 peak, prices in America now stand
at 19% below fair value. The bottom of the market is close, however. The month-on-
month Case-Shiller index of 20 cities increased for the fourth consecutive time in May,
by 0.9%. Housing sales are picking up, although they remain below their long-run
average, and the number of mortgages in foreclosure has fallen to its lowest level for
three years. Financing is cheap, too: real 30-year fixed mortgage rates are at 30-year
lows.
Other markets are still in free fall. Property prices in Ireland,
at the foot of our table since April 2010, continue to
plummet. They have now halved in value, after a fivefold rise
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1. Paul Ryan: Romney makes his choice
2. The euro: Tempted, Angela?
3. Paul Ryan's Randianism: Is Paul Ryan ahypocrite?
4. The veepstakes: Why Paul Ryan?
5. The South China Sea: Troubled waters
6. Inequality: How much equality would you like?
7. Climate change: Bell weather
8. Russian politics: Pussy Riot's final statements
9. Breaking up the euro area: The Merkelmemorandum
10. Paul Ryan: Marshmallow fluff
Over the past five days
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between 1995 and their 2007 peak. The pace of decline in
Spain, a fellow euro-zone sufferer, quickened in the second
quarter. Although prices have already fallen by 23% from
their peak, they remain well above fair value and the dire
state of the Spanish economy, where a quarter of the
workforce is unemployed, suggests that prices will keep
diving.
Such drops would be more precipitous still were it not for the
cushioning effects of ultra-low interest rates on European
mortgage-holders. Prices in Britain fell by 0.7% in July,
compared with the previous month, taking the total fall since
the market peak to a rather modest 13.1%. With many lenders hanging back, sales
remain subdued, at around half their 2007 level. The market is heavily reliant on London
and the south-east: 47% of residential transactions took place in this part of the
country in 2011.
Once-wild Asian markets are also muted. Prices in Hong Kong are now rising at a
manageable 6% a year, as opposed to 28% a year just 12 months ago. Price rises in
Singapore have slowed in recent months, too. Our index of Chinese prices fell year on
year for the fifth month in a row in June. (That may not last, however: prices of new
homes rose month on month in 25 of the 70 cities tracked and there is plenty of room for
growth.)
Indeed, so subdued is residential property
at the moment that the list of the world’s
bounciest housing markets has an
unusually Germanic flavour. Austrian
house-price rises are the only ones in
double digits; the Swiss market sits in
fourth place. As for Germany itself, prices
there have increased by a ground-breaking
5.7% over the past two years after nearly
two decades of stagnation. Hopes that a
German property boom will unleash
spending are slight, however. German regulators are watchful, and owner-occupation in
the country stands at just 46%, so any rise in prices has a fainter “wealth effect” than
in Britain, say, where 66% of homes are owner-occupied.
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