Housing markets in New Zealand, the Czech Republic, Australia and Canada rank among the world’s bubbliest and are particularly vulnerable to falling prices, according to Bloomberg Economics. Portugal is especially at risk in the euro area, while Austria, Germany and the Netherlands also are looking frothy.
In Asia, South Korea house prices also look vulnerable, according to an analysis by S&P Global Ratings. That report noted risks from household credit relative to nominal GDP, the growth rate of household debt and the speed of house-price gains. Elsewhere in Europe, Sweden has seen a dramatic turnaround in housing demand, sparking concern in a country where debt runs at 200% of household income.
Goldman Sachs Group Inc. economists wrote in a report last week that the signals from home sales typically precede prices by about six months, indicating that several countries are likely to see further declines in values. A substantial cooldown in housing markets is an important reason why developed economies will likely slow, according to the economists led by Jan Hatzius.
“The very rapid deterioration in affordability and large drops in home sales suggest that a hard landing is a meaningful risk, especially in New Zealand, Canada, and Australia, although that is not our baseline given current tightness," the Goldman economists wrote.
Central banks are issuing warnings of their own. The Bank of Canada said this month in its annual review of the financial system that high levels of mortgage debt are of particular concern as interest rates rise and more borrowers are strained to pay bills. The Reserve Bank of New Zealand’s semi-annual Financial Stability Report said that the overall threat to the financial system is limited, but a “sharp” decline in house prices is possible, which could significantly reduce wealth and lead to a contraction in consumer spending.
“As borrowing costs rise, real estate markets face a critical test,” Bloomberg's Shah said. “If central bankers act too aggressively, they could sow the seeds of the next crisis.”
Here is what’s unfolding in bubbly housing markets around the world.
NEW ZEALAND
If 2021 was the year New Zealand’s house-price growth reached dizzying heights, with an annual increase of close to 30%, 2022 is shaping up to be the year the music stops — and the abrupt change has left people scrambling.
In March, Jonathan Milne decided it was time to sell a family home in the Auckland suburb of Onehunga and purchase a larger house nearby for NZ$2 million ($1.3 million). He and his wife, Georgie, were optimistic of a speedy sale and a good price for their old home, which was valued by the local government at NZ$1.8 million.
Ups and Downs | Soaring prices are expected to give way to declines next year
All that changed in April when the RBNZ took aggressive action to tackle inflation, hiking the official rate by 50 basis points to 1.5% — its biggest increase in 22 years. It quickly followed with another 50-basis-point jump in May and a projection for the rate to peak at close to 4% next year.