Global Property Outlook

Property has been at the centre of many celebrated financial crises druing modern times. Property busts, related banking problems and then wider financial crises are a recurring theme, almost a kind of ‘never ending story’.  It was the global property crash that helped push the world into recession in 2008.  Global property looked more buoyant in 2010, with house prices up in Britain, more stable in the US, although down in Spain.  Now is a good time to take stock of where property markets could go in 2011.

But, first, we should ask why is property apparently so dangerous for banking and financial system health?  There are many reasons.  For one thing, the property market  has historically  been cyclical and prone to volatility, which can be severe.  Another factor is the comparative size of property as an investment class.  Property ownership also typically requires substantial debt and respective leveraging. These factors can conspire to help make property a ‘boom and bust’ sector and a harbinger sometimes of  related banking and financial crises.

A recent The Economist survey (‘A special report on property’, March 5^th 2011), argued that housing will be ‘a drag’ on the rich world’s recovery for some time ahead.  In this context, housing is much larger and more important than commercial property.  The housing sector (although it can produce big problems) has traditionally helped lead economies out of recession.  Globally, though, the richer  countries around the world have not yet seen the hoped-for recovery in their housing markets .

A common theme in many rich economies is uncertainty about what the future holds.  Another is the lack of available mortage finance.  UK banks, for example,  are being exceptionally strict with first-time buyers.  In this tight market, renting has become more popular.

The Economist latest house price indicators gives another insight into the global housing market.  The Economist index (last column of the table) computes the ratio of prices to rents in the 20 economies covered.   The theory here is that a home’s price should reflect the services value (expressed in rents) received.  On this measure, for example, homes in Hong Kong (an exceptionally crowded market) are not a good deal because the index is almost 54 percent above it’s long-term average (and is still rising).

Australia is the most over- valued property market in The Economist table, although it is moving slowly towards ‘fair value’ (ratio value of 1.0).  In most markets, the ratio prices/rents fell during the crises that started in 2007.  Only Hong Kong, Singapore and Switzerland have seen their respective property markets more overvalued than before the crisis.

Commercial property, though, has generally experienced a stronger recovery (especially in the best locations).  Investors have shown an increased interest in property.  This has been helped by the low-interest environment and potentially more stable cashflow from tenants.

Table: The Economist house-price indicators

% change

*Or most recent available figure †Against long-run average of price-to-rents ratio

Sources: ABSA; ESRI; Hypoport; Japan Real Estate Institute; Nationwide; Nomisma; NVM; FHFA; Quotable Value; Stadium; Swiss National Bank; Standard & Poor’s; Thomson Reuters; government offices; The Economist

Interactive: Explore and compare global housing data over time at: Economist.com/houseprices

Britain saw the biggest comparative fall in commercial property values, but is now leading the global rise in property values.  In 2010,  British commercial property produced a total return of 15.2 percent, the strongest for four years.  However, The Economist survey cautions that ‘all of this talk of rising values and space constraints can be misleading’.  They point out that the recovery in commercial property in Britain is mainly for the best, or ‘prime’, assets (like in London’s financial centre).

At the same time, the crisis has stimulated more innovation (like in property derivatives) in commercial property.  The study also suggests that interest in energy-efficient properties has been maintained during the downturn: The Economist summarises this phenomenon as ‘Greenery had a good war’.  Growing challenges on the horizon for richer countries are the comparatively high number of properties in non-prime locations and the large amount of commercial property debt, most of it falling due in the years ahead.

In the aftermath of the crisis, there is a renewed recognition that property is always going to be a volatile market.  As mentioned earlier, property volatility and financial crises appear to be  linked.  The Economist argues that a major  policy challenge must be to separate this apparent nexus.

As we move into 2011, however, global property prospects look more positive.  For the US, Britain and other rich economies, the worst of the crisis now appears over.  In other parts of the world, property demand is comparatively high.  China appears particularly prone (with enormous demand and rapid supply responses) to a property crash, according to hedge-fund manager Jim Chanos.  Since April 2010, China has launched measures to dampen its house-price inflation.

All in all, a mixed picture for global property, but generally a positive outlook for 2011 as the global economy continues along its post-crisis trajectory.

Professor Bullion