Rapidly rising housing prices are “most severe” in five developed sovereign regions of the world and are occurring alongside increased indebtedness, an HSBC report observes. The situation will create challenges for policy makers, with implications for potentially higher interest rates and related currency values. The problem is the nexus of “bubbly asset prices” with debt can derail growth “or even act as the catalyst for a downturn.”
US housing prices have been rapidly rising, but...
In the US, housing prices, particularly in hot coastal urban areas, are pushing middle-income residents out of the market. In the Anaheim / Irvine California, area, the median home now costs $745,200 and requires a salary of $136,234 to become a homeowner, according to 2016 data from the National Association of Realtors.
Nearly 385 miles north in San Jose, the most expensive region in the country, the median home costs $1,005,000 and requires a $183,730 to get your foot in the door. The Boston area requires a salary of $76,307 while Washington DC’s number is $70,256 and New York City is $69,891.
But latte sipping tech workers in Silicon Valley or the homes of K Street lobbyists are not necessarily the concerns of HSBC. When looking at the world where debt and housing bubbles collide, they cast an eye to the US’s northern neighbor as well as Europe.
“Financial stability concerns are the next big challenge facing central banks,” HSBC opined in an August 31 report “Tackling housing bubble: Who’s at risk and what can be done.” The loose money policies they have advocated my require a u-turn, particularly if the situation worsens.
...regions outside the US are hotter and could result in central bank policy adjustments
The challenge is greatest in five developed markets: Australia, Canada, New Zealand, Norway and Sweden, the report states, pointing to Canada as the biggest concern.
Canada’s housing market boom is driven by low rates, population growth, immigration, and foreign investment, but HSBC is still vexed.
“The improved fundamentals cannot explain the rise in home prices,” the report said, as consumer borrowing is outpacing economic growth. HSBC thinks the dependence on debt has “left the economy accident prone.”
Australia, however, is in a “boom, not a bubble,” particularly in the urban coastal regions Sydney and Melbourne. Low rates, strong population growth and foreign demand has driven demand, but anticipated higher rates could dampen prices in 2018. In regions with sufficient supply, however, housing prices have remained steady.
In neighbor New Zealand, however, strong demand has run into “not enough supply,” as new construction is trailing population growth.
“Auckland, we have a problem,” the report blared, pointing to a build-up in risk in the financial system where household debt is high amid a strong housing market. But the buildup has been largely limited to Auckland, where housing prices in the island nation’s largest city have rocketed 90% higher. In Wellington, the smaller capital, prices have only risen by 36% while the second most populace city, Christchurch, is up only 30%. “This regional divergence suggests that there is something driving Auckland house prices other than record-low mortgage rates,” pointing to stalling supply in the region.
On the extreme other end of the world, in Norway, which has an election approaching mid-September, is “becoming a problem.” Prices across Norway are up over 50%, but prices in Oslo 70% higher, the report noted, pointing to prices even higher than London. HSBC notes resultant policy adjustments:
In terms of the monetary response, the currency that would be most likely to strengthen on this factor is the NOK. After all, the central bank has a formal obligation to factor in financial stability when setting interest rates. The Norges Bank has made it clear that were policy currently set on this basis of this parameter alone then interest rates would be higher.
Norway is similar to Sweden, which is also seeing higher prices amid a “booming” economy and highlights a central bank policy prescription that could emerge in all regions with above average housing prices: higher interest rates and related currency values. That might not happen immediately, but eventually.