Why house prices are cooling in the world’s hottest property markets

Sascha: [00:00:02] From Equity Mates media. This is the dive. I'm your host, Sascha Kelly. Over the past couple of years, it's been hard to escape the headlines around the price of homes. 

Audio clip: [00:00:11] Millions of Americans are priced out of buying a home, often competing with all cash offers well above asking prices. 

Sascha: [00:00:19] If you live in Australia, I'm not telling you anything new when I say that house prices have been booming. 

Audio clip: [00:00:25] Sydney's housing boom is on the move with parts of the. 

Sascha: [00:00:28] West increasing by as much as $10,000 a week. But we're actually not alone. Globally, the UK, the US, Canada, New Zealand and even the Czech Republic have also experienced rapid growth in the value of residential property. But with raging inflation sweeping through the economy globally, this might be about to end. It's Monday, the 27th of June. And today, I want to know, is the housing boom actually unravelling? To do this, I'm joined by my colleague, a fierce property watcher and the co-founder of Equity Mates. It's Bryce Leske. Welcome to The Dive. 

Bryce: [00:01:03] Thank you, Sascha. Glad to be here. 

Sascha: [00:01:05] Well, personally, we love seeing property get more affordable, but it is a bigger issue than that. So not so long ago, I was seeing plenty of headlines about record prices here in Australia and similarly in other countries around the world. House prices were booming. But that sentiment is fast changing. So what's going on?

Bryce: [00:01:25] Well, that's right, Sascha. We are now seeing a lot of commentary and also evidence in the market that house prices are starting to fall in some of the earliest housing markets around the world. Now, the good news for those who are yet to get on the ladder is that it could be an opportunity, but not so great for those sitting at home who may have just bought in and started their property dream. It's no secret that the world economy is under plenty of stress at the moment. 

Audio clip: [00:01:51] With every day and essentially every downward market move. Another dire prediction of a recession.

Bryce: [00:01:56] High levels of inflation, stock market volatility and continued war between Russia and Ukraine. But central banks around the globe have rapidly increased interest rates to keep a lid on inflation, which is increasing the cost of borrowing. 

Audio clip: [00:02:12] The governor of the Reserve Bank has warned there's more pain on the horizon for borrowers. 

Bryce: [00:02:16] And those that are already stretched in the property market are finally reaching their limits. So demand is slowing and we are starting to see the property market call. The effects have been in some countries such as Canada, the US and New Zealand, which will touch on a little bit later where they once had an incredibly hot residential market. They're now starting to turn cold. 

Sascha: [00:02:36] Okay, let's turn back a few years. 2020 saw the start of the most recent price boom here in Australia and in some of the countries you just mentioned. In some instances we saw double digit growth, which is just insane. What's been driving the housing boom globally? 

Audio clip: [00:02:53] The housing market, long a source of wild intrigue, has now gone positively ballistic. 

Bryce: [00:02:59] You're right, it has been an incredible rapid in house prices around the globe, and the pandemic really kicked this off from early to mid 2020, which is where this all started here in Australia. Residential property prices rose 23% through the year to end of 2021, which is the strongest annual growth since the residential property price index series began back in 2003. 

Audio clip: [00:03:23] Prices all over the country are on the rise and analysts are baffled about when and where it's going to end. 

Bryce: [00:03:30] 2021 was the year. New Zealand's house price growth reached dizzying heights as well. Sascha, with an annual increase of close to 30%. 

Audio clip: [00:03:39] Amongst the 37 nations that make up the Organisation for Economic Co-operation and Development. New Zealand has the most unaffordable housing market. 

Bryce: [00:03:47] And in the US 2021 single family homes grew at about 18% and we mentioned Canada. It saw house prices rise more than 50% over the two years since the pandemic started. 

Sascha: [00:04:01] 50%? I mean, you just don't even have words for that. So I know every housing market is different. But were there any common traits that helped spur this boom on? 

Bryce: [00:04:12] Yes. So they're kind of three main ones, historically low interest rates, access to capital and expectations. So let's look at interest rates and access to capital. Interest rates in major markets around the world have been at record lows, driven by the government response to the pandemic. 

Audio clip: [00:04:29] The bank has cut the cash rate from 0.25 of a per cent to the new record low of 0.1 of a per cent. 

Bryce: [00:04:36] When money is cheap, it means two things. Firstly, more people can borrow it and secondly, they can borrow more of it. And so with money more widely available and with borrowers able to lock in low repayment rates, it gave buyers more confidence to to borrow. 

Audio clip: [00:04:51] Out of 1 million new home loans written over the past two years, about 280,000 Australians have borrowed six or more times their. Come and or put down a deposit of less than 10%. 

Bryce: [00:05:04] People were stretching themselves. They were paying higher and higher prices. The banks were giving them more money. And it was still remaining incredibly cheap to access this money from banks around the world. Now we know that this then just has the flow on effect of if you're at an auction, you're likely to just go that little bit more and push yourself a little bit further, driving up prices further and further at 1. 

Audio clip: [00:05:24] Million 155 we're going. 

Bryce: [00:05:28] Towards. No doubt the pandemic also increased demand for housing here in Australia. We saw more first home buyers entering the market at the start of the pandemic. We see demand for larger homes increased as people's working habits changed around the world. And we saw the rise of the regions as more people left the bigger cities and bought houses in regional areas. So with an increase in demand, somewhat of a limited supply, there was a bit of a housing supply crunch in the US. Housing inventory, which was already trending downward before the pandemic struck, fell to a 40 year low during the boom. So we had cheap money, access to capital, not a lot of supply and increase in demand. And that has one effect skyrocketing prices. 

Sascha: [00:06:14] And I think there's one more factor, which I'm definitely guilty of, and that's the FOMO factor. 

Bryce: [00:06:19] You are bang on. And this is one that economists often talk about. It's the exuberance of agents in the market, and it's where people see the headlines that house prices are going up. They then have expectations that it's going to continue to go up and they feel like they're going to miss out. If they don't get in, they feel like they're never going to have the opportunity to get in. They're getting priced out of the market. And so this forces buying action. We saw this across the world with house prices rocketing, people jumping in, you know, thinking that if they don't get in now, then they're going to miss out. And of course, that just increases demand. So we had all of these factors at play which have led to some of the fastest house price growth on record around the world. 

Sascha: [00:07:00] So that's what led to the housing boom. Let's take a short break. And then when we come back, I want to talk about the signs that we're starting to see that might mean that the market is starting to call. Welcome back to the Dive. I'm joined today by my colleague Bruce Laskey. And we are talking about the housing bubble and the fact that the writing is finally on the wall, that the tide might be starting to turn. Well, that's what Bryce is going to tell me about today. We're here to understand if it is unravelling. Will we see a crash or. I saw this description today and I really like it. A stumble. 

Bryce: [00:07:39] Will we see a stumble, Sascha? Well, there's no doubt that there is a bit of a reversal in some of the favourable conditions we spoke about earlier that led to the boom. So I guess firstly we should stress before people start freaking out, this is not unlikely to be a 2008 American or Irish start or collapse. Lenders have tightened their standards. We know household savings are still pretty robust and many countries still have housing shortages. So that sort of those conditions are all favourable to propping up house prices. Labour markets are also still strong, providing some important buffers to the market. However, the global response to soaring inflation has been to increase interest rates, which is pushing up the cost of borrowing, which we know is a key factor to the price of housing. 

Audio clip: [00:08:25] The question this morning, how much will the Fed raise interest rates as it tries to bring 40 year high inflation under control, now running at 8.6% year over year. 

Bryce: [00:08:36] More than 50 central banks have raised interest rates by at least 50 basis points in one go this year, with more hikes to be expected in the US, the Federal Reserve boosted its main interest rates by 75 basis points, most recently its biggest increase since 1994. 

Sascha: [00:08:53] When we say basis points, is that 0.75 of a percent, correct? 

Bryce: [00:08:58] Yes. 50 basis points. 0.5 of a percent. 75 basis ..05. Now, we know that central banks lift rates to kerb demand across the economy and that flows through to housing. And as the cost of money is increasing, people aren't borrowing as much. And that's one reason that they're trying to take a bit of this demand out of the economy. 

Sascha: [00:09:17] We've spoken a lot about monetary policy, i.e. central banks are moving interest rates. But I'm assuming that governments don't want to see a massive fall in housing prices. So how are they reacting? Are they doing anything to prop up housing markets or try to kind of soften the blow of this steady reduction in prices so that there is a nice cushioned landing rather than a crash where. 

Bryce: [00:09:40] You're right, Sascha, now, not to get into the politics of it all, but it's generally favourable for politicians to have a strong housing market. So they they do like to see steady house price growth. New Zealand have ended negative gearing though in 2021. We know that's been a tax break that has really helped many investors outgrow a portfolio of housing property that has left just Australia and Japan as the two countries to allow full negative gearing. So we'll be interesting to see what happens on that front. And in the US, President Biden released his housing supply action plan. 

Audio clip: [00:10:13] President Biden's plan calls for boosting the number of quality houses available to buy in every community. 

Bryce: [00:10:18] Focussed on building half a million affordable homes in the next three years to increase supply. So there is action being taken by governments around the world, mainly to increase the supply side, take out a bit of demand, but at the end of the day, do they want to see the prices fall? That's open for debate and perhaps another episode.

Sascha: [00:10:37] Yeah, exactly. We're not a politics podcast, even though we get dangerously close often, do we? So let's move across to what some of these warning signs are. I want to understand what factors we should look for that show that the market is cooling. 

Bryce: [00:10:52] Yes. So outside of just sensationalist headlines, they can often make the front page of the paper that houses are crashing. There are a couple of leading indicators that you can track to get a sense of where the market is likely to head. So the first, particularly here in Australia, is auction clearance rates. What does an auction clearance might mean? It means that properties went to auction on a specific day, what proportion went to auction and what's sold. Now, at the height of the housing boom in the pandemic, clearance rates were incredibly high, 80% or above. And they say that when it's above 60%, it's a seller's market. They're dictating. The market at the moment are the most recent clearance rates. It was just above 60%. So almost half of the homes that are going to market aren't selling at the moment, which we know that means far less demand than they used to be. And it's certainly becoming a buyer's market. Otherwise, you can look at houses that are selling below their listing prices. Plenty of stories coming out there and also time on the market. The average time on market pre-pandemic in the UK was about 108 days. So in other words, 108 days before it would be sold in some areas during the pandemic, this was reduced to just six weeks, so houses were selling incredibly quickly. We're now starting to see that rise again a little bit closer to the average. So time on market clearance rates and selling below listing prices are all leading indicators. It, the housing market could be cooling. 

Sascha: [00:12:17] So then my curiosity just wants to know where are the bubbles, the bubble iest, where's the lava really seeing the bubbles flying around? I don't know. You know, we can go with the imagery there a little bit. 

Bryce: [00:12:30] Well, Sascha, let me take you on a quick tour around the world. So housing markets in New Zealand, Czech Republic, Australia and Canada are amongst the world's largest and are particularly vulnerable at the moment. Bloomberg Economics has ranked our OECD members in terms of list and we had New Zealand at the top, then Czech Republic, Hungary, Australia, Canada, Portugal, US, Austria, Russia and Luxembourg. So New Zealand. 

Audio clip: [00:12:55] Prime Minister Jacinda Ardern has been criticised from both sides of the political spectrum this week about her government's apparent lack of effective action on the housing crisis as house prices continue to go through the roof. 

Bryce: [00:13:07] 2021 was the year that house prices went crazy. Annual increases of over 30%. However, economists expect that house prices will fall 10% this year and may eventually drop as much as 20% from their peak in 2021. If we move through to the UK again, the housing market is starting to slow. After two years of historic growth as part of the pandemic measures, home buyers were exempt from a stamp duty tax on properties valued up to £500,000. That really stimulated growth and a lot of demand. However, that is unlikely to continue and the central bank has raised rates in the UK five times in recent months, so we can expect some cooling there. The US, we know, had strong growth, but mortgage rates have increased this year at the fastest rate on records dating back half a century. The average rate for a 30 year loan reached 5.78% last week, which is the highest since 2008. And this is leading to price cuts from not only existing home sellers, but also builders. 

Audio clip: [00:14:11] New construction starts have plunged for the second month in a row, according to the Census Bureau report last week.

Bryce: [00:14:18] Almost 20% of U.S. home sellers cut prices when they went to sell in May this year. So not a good sign for for house prices over in the states. And again, Canada, which we know 50% increase over the last two years. Like other countries, Canada's housing market is is looking like it's cooling off with increasing interest rates again from the central bank over there. So yeah, some of the bubblicious markets here in Australia now all starting to come under pressure. The big question is, is this a crash or a slump? It certainly feels like it's cooling. 

Sascha: [00:14:52] Or a stumble, which is, you know, the new that I'm going to be using. So I think I need to ask because I don't have a house. You don't have a house. But as people who are working and part of the economy, we're still going to feel the effects of this, aren't we? What are some of those impacts? 

Bryce: [00:15:08] Yes. So they are broad implications across the economy when house prices slump and a lot of it is expectation and confidence driven. So much of your wealth is tied up into your house. And when you see the price of your house going up and up, you're more likely to feel confident and have the ability to, you know, more discretionary spending. If interest rates are low, you know, you're not spending so much of your income paying off your mortgage. The implications of a falling house market is that it erodes a lot of household wealth. Obviously, your house price goes from 7 million bucks to 900,000. It can really damage consumer confidence and then therefore we're less likely to spend on other discretionary items. If my mortgage rate is going up as well, more of my income is getting tied up in paying off my interest rate again, then having less income to go and spend on goods and services in the economy which can lead to a downturn in the economy. Builders and less likely to go out and build more if they know they're not going to be able to get as much for housing. So there's a lot of flow on effects that can come from a slump in house prices and certainly one that we need to keep an eye on from here. 

Sascha: [00:16:13] But leads one question, and that's where to from here. What can we expect? 

Bryce: [00:16:17] Well, Sascha, hopefully it means we can get a house. I'm not sure if it was a seller's market and it is now fast becoming a buyer's market, which is good news for those looking to try and get in. But what can we expect? Well, we know that the central banks around the world are likely to keep increasing interest rates. That's just going to have further flow on effects to the cost of money and the ability to borrow some expectations from economists around the world. We might see a decline, sort of taking prices back to the where we were close to 2020, which would be reasonably significant in some countries. But, Sascha, I think the key takeaway here is that no one really knows when there's bubbles like this. It's it's not surprising to see some of the bubble of bubbles or of a little bit. But, look, I'm just certainly keeping a close eye because should we see a drastic fall? It's definitely going to provide some opportunities for those who aren't in the market.

Sascha: [00:17:13] Well, we're all about opportunities here. Equity Mates. So I think that's a nice way to end. Thanks so much for joining us for today's edition of The Dive. If there's a story that you'd like us to talk about, then do contact us. The dive at Equity Mates dot com is our email address. The link is in our show notes just below and whatever podcast player you're looking at and while you're looking at your podcast player, do try and give us a five star review and write some nice words. It makes all the difference in other listeners finding us. Well, maybe just send a copy of this episode to one of your best friends and say, Check out this great podcast that I'm obsessed with and remember to subscribe in whichever podcast player you listen to so you'll have every episode the second it drops. Thanks so much for joining me today Bryce to talk about your favourite topic which is property. 

Bryce: [00:17:58] Thank you for having me. 

Sascha: [00:18:02] I'm putting words in your mouth too, but I'll talk to you next time.