Rate boost starting to wane

Overseas Property | Hari Kishan 28 Nov 2019

The era of rock-bottom interest rates is not yet over, but the boost given to global property prices by easy policy since the financial crisis appears to be ending.

More than a decade of easy money has pushed most asset prices to record highs, including house prices, which have climbed each year at many multiples of consumer price inflation and wage gains, making many markets unaffordable for first-time buyers.

The change in sensitivity to interest rates is not universal. But it is particularly notable in the United States, where the Federal Reserve has cut rates three times this year with no major boost to the housing market outlook.

The findings of Reuters polls of over 100 housing market experts this month have implications for the effectiveness of future monetary policy in one of the most typically rate-sensitive sectors of most developed and developing economies.

That may be all the more relevant given many central banks had made scant progress in raising rates back to what would have been considered normal levels before the global financial crisis erupted more than a decade ago.

"Monetary policy's ability to stimulate housing demand is far less effective than earlier in the cycle," said Scott Anderson, chief economist at the Bank of the West.

Of the seven housing markets polled - the US, Britain, China, India, Canada, Australia, and Dubai - none were rated by analysts as fairly priced.

Broadly speaking, where house prices are rising, analysts expect them to be tame next year and to be more reliant on incomes rather than the cheap cost of borrowing.

"We've had a big upward price adjustment over the past 10 years because of ultra-low rates, and that process is hitting its natural limits," said Liam Bailey, global head of research at Knight Frank. "You need to have prices driven by wage inflation."

Analysts expect prices in the US and the UK to rise over the next two years but at a slower pace than what was predicted three months ago. And Dubai property prices are expected to tumble further until 2021.

While each property market is naturally facing its own set of domestic challenges, a common concern is a renewed global slowdown and trade friction stemming from the US-China trade war. Part of the extra froth in property markets since the crisis has been founded in easy cross-border investment.

"[Over] the last few months, we've started hearing from firms about that uncertainty having a negative impact, even if firms aren't dealing directly with China," said Scott Brown, chief economist at Raymond James.

US house price inflation has slowed over the past year and a half, roughly coinciding with the opening salvos of the ongoing US-China trade conflict.

Property prices and turnover in the UK have taken a knock, particularly in London, since the shock vote in 2016 to leave the European Union, and any price rises in the coming year are expected to lag inflation.

In China and India, which together make up about 40 percent of the world's population, house prices are expected to rise by about 3 percent next year - barely above consumer price inflation in one and below it in the other.

But the trade war and an ongoing liquidity crisis in India's banking sector will likely drag on those respective property markets.

Median 2020 house price forecasts for Canada and India were upgraded modestly.

Australia was a notable exception, where expectations for next year doubled to 5 percent over the last three months following a burst of activity thanks in part to Reserve Bank of Australia interest rate cuts. But even analysts there were skeptical about how long the rebound would carry on.

Despite the current global economic slowdown, oversupply seems to be an issue largely confined to emerging markets. In advanced economies, the opposite is true, most notably in the US, where a dearth of new homes has been an issue for years. Despite strong demand, supply is not expected to improve significantly anytime soon.


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