Housing markets in U.S., UK, Canada set to cool even if rates stay low for longer

November 25, 2014

AEven as the expected date for an eventual interest rate rise in the U.S., Britain and Canada keeps getting pushed further into the future, the outlook for residential housing markets in these countries is also starting to cool.

While all three of these property markets have been following trajectories of their own since the financial crisis hammered the industrialised world after the collapse of Lehman Brothers and brought about zero, or near-zero, interest rates soon afterward, they all are expected to generate less lofty price rises, according to the latest round of Reuters Polls.

This could mark a turning point for housing more broadly, given that the main reason behind these lowered expectations is fundamental: fewer new households because people looking to purchase their first property find prices are too high. While prospects are perhaps slightly better in the U.S., the fact that its housing market collapsed by anywhere from a third to more than 40 percent and many still can’t afford to buy at record low interest rates could bode very ill for the broader outlook given that rates eventually have only one way to go.

The latest set of Reuters polls on housing markets predict more subdued price rises in all three markets than just three months ago. This development has coincided with rapidly fading expectations for a Bank of England rate rise next year as well as from the Bank of Canada, and rising doubts whether the Fed, so soon after shuttering years of printing money just last month, will opt to raise rates by the middle of next year.

“Housing is improving, but it is not nearly as good a market as we would like it to be. Young people are delaying forming households; that’s why sales haven’t taken off,” said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts.

Indeed, the problem is that institutional investors in the U.S. have reaped many of the recent gains, buying up cheap homes and apartments when the market hit bottom and converting them into rental units, pushing aside potential buyers. The proportion of first time buyers in the resale market is at the lowest in three decades and annualĀ price rises are slowing sharply.

In Britain, where prices didn’t drop by anywhere near as much as in the U.S. and have shot back up again, it’s even tougher for first-time buyers to come up with a deposit, even one as low as 10 percent. That reality prompted the government to launch a programme last year to make it easier for first-time buyers to purchase a home by subsidising the deposit with a state guarantee.

That policy lit a fire under the whole UK property market, triggering double-digit price rises nationally and a recent rise of about a quarter or even more in already eye-wateringly expensive house prices in London. The net result is it’s still harder than ever for young families to afford their first home because prices are now so much higher.

For those who already own, record low interest rates provide cheap financing. For those who don’t, it’s much harder.

“In other words, the market is unaffordable for those with no capital but pretty good for those who don’t have to scrape together a deposit,” said Peter Dixon, European economist at Commerzbank.

The divide between those who can afford and those who can’t keeps widening.

As one analyst polled by Reuters pointed out, 40 percent of home buyers in Britain are buying in cash, often using their capital gains from existing properties. Even in London, where the average price of a home is over 460,000 pounds compared with an average salary of about 35,000 pounds, many transactions are done completely in cash.

If that weren’t enough, a mortgage market review conducted by the Bank of England has made it incrementally more difficult for those applying to actually get a mortgage.

Which brings us to Canada, where property prices have been moving almost exclusively in one direction — up — for the better part of a generation, leaving some people with no understanding or experience of a fall, let alone a moderation.

UK and Canada house prices

 

Unlike in Britain, where there is precious little space to meet a constantly growing demand for housing that is thwarted from being built quickly enough by complex planning regulations, Canada is the second largest country in the world, with 10 million square kilometres of land — admittedly the bulk of it rugged and remote and frequently covered in snow.

With a household debt to income ratio of 164 percent, which is as high as it was in Britain before the financial crisis set in and prices there fell by about a fifth, there remains a real risk of a property market crash.

“(The) housing market has remained positive because of lower mortgage rates, and that will only last until part way next year. As the rates increases, the pressure on housing will increase and demand for homes will decrease, causing prices to start to fall,” said Sadiq Adatia, chief investment officer at Sun Life Global Investments.

Of course if base rates stay at record lows for longer, then mortgage rates may stay as low as they are for much longer as well.

But that prospect is not leading many to feel particularly optimistic about big gains in real estate markets — at least in the U.S., Britain or Canada, in coming years.

“Whether using salary multiples or yields housing is expensive and appears to have peaked for this cycle,” said Henry Pryor, a London-based independent real estate analyst.

 

 

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