The frothiest real estate markets are ringing alarm bells not heard since before the global financial crisis, the report warns.
“A cocktail of ingredients is sending house prices to unprecedented levels worldwide,” wrote economist Niraj Shah, Bloomberg reports.
“Record low interest rates, unparalleled fiscal stimulus, lockdown savings ready to be used as deposits, limited housing stock, and expectations of a robust recovery in the global economy are all contributing.”
Bloomberg Economics Bubble Ranking
The riskiest housing markets were in New Zealand, Canada, Sweden, Norway, the UK, Denmark, the US, Belgium, Austria and France, the report found.
With interest rates low, the report said there was no obvious trigger that would cause housing prices to fall, but it warned that when interest rates rise, real estate markets will face a test.
When the Federal Open Market Committee begins its two-day meeting on Tuesday, it ought to consider whether its policies aimed to bolster housing may be having negative side effects.
With the market for new and existing homes red hot, the rationale for subsidizing the mortgage market has largely passed. Indeed, the Fed’s policies may be hurting home affordability as much as they’re helping.
Strong housing and mortgage activity argues against the Fed effectively subsidizing a sector that is near bubble territory. According to the Home Price Appreciation Index from the American Enterprise Institute, prices are up 12.6% in the 12 months through March, a doubling of the pace from a year ago. Among various markets, Phoenix was up 17.7% while the smallest gain was in the New York metro area with a 7.0% rise.
“Monetary policy that supports the extension of easy money when house prices are rising at record rates makes no sense. It’s one thing to misread the tea leaves of an asset bubble, but it’s another thing to be the enabler,” Carson writes.
One way to stop inflating home prices would be for the Fed to reduce its purchases of mortgage-backed securities. If that suggestion sounds familiar, it’s because Peter Boockvar made it in this column back in December.
Home prices in the U.S. are rising to new levels, even surpassing pre-crisis levels in some metros, but home prices in the U.S. are relatively low compared to other developed nations.
Over the past few years in the U.S., home prices peaked in July 2006, troughed in February 2012 and have since returned to pre-crisis levels once again. However, this wasn’t the case for other developed nations. Other G10 economies never saw a downturn, and have continued increasing.
The Group of Ten is made up of eleven industrial countries (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States) which consult and co-operate on economic, monetary and financial matters.
Now, some are concerned about broader consequences if the real estate markets go south, according to a report from Goldman Sachs. The report explains there are no imminent problems in G10 markets, but current imbalances could worsen cyclical weakness later.