Wondering where Shanghai property prices are heading? The answer may lie in London or Tokyo market moves, according to new research by the International Monetary Fund (IMF).
Based on a study of 44 cities and 40 advanced and emerging market economies, IMF researchers found growing house price synchronization worldwide, attributed to increased integration with global financial markets amid expansionary global monetary policy and improving world economic growth.
The IMF also points to the role of institutional investors, private equity firms, and real estate investment trusts, which have been increasingly active in major cities such as Amsterdam, Sydney, and Vancouver in search of higher returns.
Wealthy individuals have also targeted properties in major financial centers in search of safe investments. As noted by the fund, “because the wealthy prefer high-end properties, their investments push up prices in expensive neighborhoods in places like New York and London at the same time.”
However, the amplification of price gains has a downside, too. Any sudden reversal or economic shock in a particular market could trigger a broader decline, “raising the specter of financial instability,” the Washington-based institution warns in its “Global Financial Stability Report.”
The report shows widespread gains in property prices since the global financial crisis, with Asia leading the pack. From 2013-17, Shanghai has posted average annual house price growth of around 13 percent, outpacing China’s overall market growth of below 5 percent.
The Oceania financial centers of Auckland, New Zealand and Sydney, Australia also posted double-digit gains, ahead even of London’s 8 percent annual average rise.
Among Asian financial centers, Hong Kong saw around a 5 percent gain, while Tokyo grew by 3 percent a year, more than double Japan’s national average.
In contrast, Jakarta and Seoul saw minimal rises, while Taipei retreated along with Singapore, joining Paris and Rome in negative territory.
Rather than simply reflecting local property demand, the IMF argues that “house prices are starting to behave more like the prices of financial assets, such as stocks and bonds, which are influenced by investors elsewhere in the world. In countries that are more open to global capital flows, prices of both homes and equities tend to be more synchronized with global markets.”
Yet such moves are potentially adding to the affordability issue for local buyers in a range of major city property markets.
As previously noted by Pacific Money, Hong Kong and Sydney have been rated as the world’s most unaffordable cities in which to buy a home, a ranking they retained in the latest global survey by U.S. consultancy Demographia.
According to the 2018 survey, Hong Kong, Australia, and New Zealand ranked overall as the least affordable housing markets. Among 293 housing markets worldwide, the survey found no affordable markets in Australia, Hong Kong, Japan, New Zealand, Singapore, or the United Kingdom, based on its “median multiple” of the median house price divided by median household income.
“Fundamentally, differences in housing affordability can virtually translate into similar differences in the standard of living. Worsening housing affordability and the resultant standard of living declines threaten one of the greatest recent human advances – the democratization of prosperity,” Demographia said.
According to the researchers, “virtually all” the severely unaffordable major housing markets have restrictive land use regulations, usually an urban containment policy that severely limits or prohibits new housing development on and beyond the urban fringe.
It pointed to Singapore’s “remarkable success” over the past 50 years in making housing affordability a principal priority, while New Zealand’s new government has also pledged to address the issue of urban containment.
Nevertheless, the IMF’s research suggests that policymakers can help contain surging house prices in domestic economies, even in cities that are a hub for global investors.
“…Policy actions to cool down hot housing markets remain effective and can have the additional benefit of taming house price synchronicity. Such actions include raising property taxes and stamp duties and limiting the size of a home loan in relation to a home’s value,” the report said.
“More broadly, policies that enhance resilience to global financial shocks may help. These include flexible exchange rates, which give policymakers more control over domestic borrowing costs, as well as policies to protect consumers against excessive indebtedness during housing busts.”
In Australia, macro-prudential restrictions introduced in 2014 by the Australian Prudential Regulation Authority (APRA) have been credited with cooling a housing boom in the nation’s major cities of Sydney and Melbourne.
Under the controls, APRA restricted individual banks from exceeding 10 percent loan growth in investor lending over a 12-month period, while interest-only lending was capped at 30 percent of all new loans issued.
Around six months after the latter measure was introduced, house prices started cooling, with Sydney’s price growth recently turning negative for the first time since 2012, according to Business Insider Australia.
Other cities such as Vancouver have moved to curb foreign investors, with the Canadian city imposing a 15 percent tax on foreign home buyers.
Australia’s three largest states have all imposed taxes on foreign purchases of residential property. The move followed data showing overseas buyers, reportedly mostly from China, were purchasing a quarter of all new homes in New South Wales state, 17 percent in the state of Victoria, and 8 percent in Queensland state.
The effectiveness of such measures remains under debate, amid suggestions that wealthy buyers from Asia and elsewhere will continue to target property in global cities considered attractive from both an investment and safe-haven perspective.
However, the IMF suggests policymakers keep a close eye on house price synchronization for another important reason. It argues that higher synchronization “corresponds to increased downside risks to growth at horizons of up to one year, controlling for other financial and macroeconomic conditions.”
In other words, movements in house price synchronization can provide an indicator of the “tail risk” of an economic downturn, up to one year ahead of the event.
With Asia’s mega-cities now part of the global property market, a downturn in Shanghai property could quickly rattle London real estate. “Location, location, location” may still be key in real estate, but buyers, investors, and policymakers alike can no longer afford to ignore international markets’ influence.