Lengthy housing boom, high debt levels, and floating rate debt have contributed to the risk
Australia’s housing market is among the four riskiest in the world, accompanied by Sweden, Canada, and Hong Kong, according to the new report from Oxford Economics.
The report, Assessing the risk from high house prices, revealed housing market danger in the four nations is “especially acute”, which historically could threaten economic activity.
“In all four, valuations are very elevated, there has been a lengthy housing boom, debt levels are high and there is a significant share of floating rate debt,” Oxford lead economist Adam Slater said in a research note. He also said house prices are already dropping in Sweden and Canada, while mortgage rates are climbing in Canada and Hong Kong.
On a positive note, risks are relatively limited in key markets, which include the U.S., Germany, France, China, and Japan.
“So, the classic ‘trigger’ for house price declines is largely absent,” Slater said. “However, rising rates are not strictly necessary for prices to start falling (as Sweden is already showing) and in the context of high valuations and debt, even modest increases (such as seen in Canada and Hong Kong) could be a problem.”
Based on Oxford’s findings, Australian home prices increased by 0.3% in real terms, while the country’s housing market held on at a floating rate of 82%. On the valuation index, where the long-term average is 100, the Australian housing market is at 160, Canada at 173, Sweden at 165, and Hong Kong at 203.
Oxford has compared valuations across OECD countries from 1970-2013 and found no clear relationship. When valuations were 25% or more of the long-term average, real house prices dropped 58% of the time following the next five years. When valuations were 35% or more above the average, prices dropped 75% of the time, with a median decline of 14% and drops of more than 20%.
“This points to many OECD countries seeing stagnant or negative real house price growth in the next few years. The scope for a further house price ‘melt-up’ in highly valued markets looks extremely limited,” Slater said.