Global boom runs out of gas

The credit crunch and high inflation have dragged down home prices across the globe, signalling an end to the housing boom, a survey by online property-research house Global Property Guide shows.

During the year up to the end of the first quarter, only 13 countries where dwelling-price indexes are regularly published saw home rates rise, while 21 countries saw prices fall in real terms, that is, after adjusting for inflation.

Even in countries where home prices have not taken a tumble, they are clearly losing momentum.

Prices in the United States up to the end of the first quarter fell by between 4.2 per cent and 18.1 per cent after adjusting for inflation, depending on the index used.

In Europe, significant real house-price declines were seen in Ireland (13.2 per cent), Luxembourg (5.8 per cent), Portugal (4.3 per cent) and Malta (4.9 per cent).  

Home prices in the United Kingdom were only slightly lower, the downturn having begun in earnest only early this year. The prices fell 0.7 per cent to 2.1 per cent (inflation-adjusted) during the first quarter, depending on the index used.

In Japan, the housing market is losing momentum once again. The urban land price index for six major cities was up only 4.1 per cent year on year during the first half of this year (2.9 per cent after inflation) in nominal terms, down from 7.8 per cent over the same period last year (7.9 per cent after inflation). The national index for Japan fell 0.7 per cent year on year (1.9 per cent after inflation).

In nominal terms, 28 countries recorded a price rise during the year to the end of the first quarter, while only six saw prices fall.

However, when prices are adjusted for inflation, a different picture emerges. In Ukraine, home-price growth was sharply down to 18.2 per cent in the year to the first quarter of this year from 79.5 per cent in the year to the first quarter of last year. But when adjusted for inflation, prices actually fell 6.4 per cent year on year.

In real terms, prices fell in Norway, Spain, Greece, South Korea, New Zealand, Indonesia, South Africa, Israel, Estonia and Lithuania, despite nominal rises.

Strong house-price increases were observed in a handful of emerging economies.

Leading the pack was China (Shanghai) with a 40.5-per-cent nominal house-price rise. Other countries with impressive price increases were Bulgaria (31.6 per cent), Hong Kong (31.1 per cent) and Singapore (29.8 per cent). Strong price gains were also seen in Cyprus, Australia and Taiwan. But when adjusted for inflation, many of the price increases look less impressive.  In what may illustrate the point, the world's top-performing housing market was not China or Hong Kong or Singapore, but Slovakia, where real house prices rose 29.3 per cent.  

There were three factors that put an end to the price boom. First, home rates in many countries had become stretched because of the long duration of the boom. The main indicator of this is the price-to-rent ratio, which compares the price of a dwelling with the rent it commands. As the boom progressed, prices shot up, leading home-buyers to decide in favour of renting properties.

Second, inflationary pressures forced central banks to raise interest rates. This particularly affected European countries where mortgage loans are primarily made on variable interest rates. In developing countries, the overall economy - which determines the mood in the housing market - is sometimes very sensitive to interest-rate changes or direct intervention by monetary authorities. But they generally have smaller mortgage markets, reducing the impact of an interest-rate hike on housing markets.

Last, the world's banking system is yet to recover from the financial shocks arising out of the home-price falls. Until the financial institutions hit by the credit crisis feel more confident, loan volumes are likely to fall. Therefore, it seems likely that the world's house-price momentum will continue losing steam, the survey said.