Assessing the risks from high house prices

Abstract

▀ Global house price growth is slowing but remains relatively solid and, therefore, supportive of the global upturn. There are rising risks, however: prices are stagnating or falling in some highly valued markets; some emerging markets are facing local financial stresses; and OECD housing valuations, while well below the 2006–07 peak, are now comparable to earlier peak levels. ▀ Our in‐house world house price index shows real (inflation‐adjusted) growth falling from 4% in mid‐2017 to 2.7% in Q2 2018. This is slightly above the long‐term average rate since 1997. But trends across economies are very varied – price growth is rapid in Hong Kong, the Netherlands and Mexico but negative in Canada, Italy, Brazil, Turkey and Sweden. ▀ There are some signs that high valuations are now weighing on price growth, with most highly‐valued markets seeing stagnant or negative price growth. There are a few notable exceptions that may be risk hot‐spots for the future: Hong Kong, Ireland, the Netherlands and New Zealand are combining rapid price growth with relatively high valuations. ▀ Median OECD house price valuations are below the 2006–07 peak but are higher for a several risky markets. Historical experience suggests that high valuations – of 125% or more of the long‐term average – point to a 60% chance of prices falling over the next five years. This matters because house prices can have a big impact on economic activity, even if the link may have loosened in the G7 in recent years. ▀ Looking across a range of housing risk indicators, property market dangers look concentrated in a number of smaller advanced economies and are less severe for the largest economies. The potential ‘trigger’ of rising interest rates is limited or missing for most advanced countries (although it is not strictly needed for prices to start falling) but is present for some emerging countries.