Global Real Estate Trends

A Long And Winding Road

Global real estate markets entered 2010 with a renewed sense of optimism, piggybacking on the broader economic recovery underway. Housing demand and pricing improved in the first quarter of the year in the majority of the advanced nations we track, benefitting from ultra-low interest rates, improved affordability, and in some cases, government purchase incentives

Australia and Canada, with inflation-adjusted average home prices rising at double-digit rates, led the pack, mirroring their relatively more favourable employment and lending conditions. Sweden and Switzerland were posting steady increases, while in the U.K. home prices moved back into positive year-over-year territory for the first time in two years. The U.S. and French property markets were reporting only marginal declines.

There were a few exceptions to this generally improving trend, notably Spain and Ireland. Home prices in both nations were still declining on a year-over- year basis, weighed down by a large oversupply of housing and high unemployment. Japan’s property market too shows little sign of emerging from its two-decade long slump.

A handful of these markets have now reported official second-quarter figures. Based on the available data, residential real estate activity appears to have cooled again. Demand and prices have softened alongside moderating global growth, heightened financial market volatility and sluggish job creation.

The slowdown has been most dramatic in Canada. Average home prices in Q2 were up just 6.8% y/y, compared with 16.6% y/y in Q1. Sales, while still at a high level, have trended steadily lower alongside reduced affordability and exhausted pent-up demand. Meanwhile, increased listings are tilting overall market conditions back in favour of buyers. We expect demand to remain at a lower ebb into next year, and prices on average to be roughly flat.

In the United States, real home prices broke into positive year-over-year territory in Q2 for the first time since 2006. However, monthly data point to a clear slowing in sales following the April 30 expiry of the federal home buyer tax credit. Weak employment growth combined with a considerable inventory overhang and rising foreclosures offer little prospect of any significant turnaround this year.

Data for the U.K. are mixed, but consistent with a modest cooling of its nascent housing recovery. Consumer confidence has been hit by a soft job market and forthcoming austerity measures aimed at reining in bloated public sector deficits, while supply has been lifted by the mid-May elimination of the Home Information Packs requirement for sellers. In Switzerland, real home prices were up a modest 3.6% y/y in Q2, continuing the trend of positive yet moderating price appreciation. In Spain, prices continued to decline.

Australia’s housing market, supported by low joblessness and a shortage of properties for sale, has largely bucked the cooling trend. Real home prices were up 15.3% y/y in Q2, down only marginally from the 16.8% Q1 pace. Nonetheless, we expect rising interest rates and weak affordability will begin to temper activity by the second half of the year.

The transition underway in global housing markets from the overvaluation and overbuilding of the mid- to late-2000s is expected to be slow and uneven. In some of the hardest-hit markets facing ongoing deleveraging by households and governments, the U.S., the U.K., Spain and Ireland included, we continue to anticipate a multi- year period of adjustment. In higher growth nations such as Canada and Australia, housing activity should prove much more subdued than in recent years.

Canada’s Resale Market Outperforms New Housing

Sellers of resale homes have consistently commanded greater price increases from buyers over the past decade than have new home builders. Between 2000 and the first half of 2010, the average cost of a new home increased by just over 50%. Over the same period, the average price of a resale home more than doubled.

Sales of new and resale homes are driven by the same underlying factors ”primarily interest rates and employment/ income growth. Traditionally, the demand and pricing for new homes mirror, but with a lag, trends in the resale market. When resale housing selection is limited, and/or prices are increasing sharply, buyers are more likely to consider a new home purchase.

Several factors likely account for the outperformance of the resale market during the housing boom of the past decade:

For one, the supply of resale homes has been extremely tight. A strong economy, low interest rates and mortgage market innovation led to record housing demand, overwhelming the more moderate rise in listings. As a result, prices have been bid up beyond what would otherwise be expected given underlying economic, financial and demographic conditions.

A healthy supply-demand mix in a balanced market typically sees the addition of two new listings for every resale transaction. With the exception of the 2009 recession, the average new-listings-to-sales ratio in Canada has hovered between 1.40 and 1.80 ”consistent with a strong sellers’ market ”since 1999. In contrast, the stock of newly completed and unabsorbed new homes has been more in line with historical norms, limiting the negotiating power of developers relative to resellers.

Second, rising employment and incomes, alongside increasing household wealth (including housing wealth) have encouraged home equity withdrawals and fuelled a boom in renovation activity. Residential renovation expenditures, adjusted for inflation, increased at over a 7% average annual rate between 2000 and 2009. Over the prior decade they declined by an average of 1% annually.

These housing re- investments have added value to the existing stock of resale homes. Combined with any new housing inventory making its way back onto the resale market, and the typical Canadian resale home likely contains more updated and sought-after features which would account for some of the rise in average selling prices. According to Statistics Canada latest Survey of Household Spending, the share of households having two or more full bathrooms rose from 34.8% in 1997 to a record 42.1% in 2008.

The average home is also getting bigger, at least until fairly recently. The share of households with seven or more rooms in the home rose from 38.0% in 1997 to a peak of 41.8% in 2006. It had edged down slightly to 41.3% by 2008, likely reflecting the rapid growth in multi-unit housing construction in recent years (multi-unit projects now account for roughly half of all housing starts). While these larger homes would be expected to command a higher selling price, official statistics on new home prices are measured on a constant-quality basis which takes into account any shift in the size of new homes or in the quality of its fixtures.

Third, urban land values are being driven up by increased population density and the revitalization of downtown cores. Lifestyle considerations are alsoat play, with increased traffic congestion and lengthy commutes raising the attractiveness of urban living. The overwhelming majority of home sales in central municipalities, especially sought- after established neighbourhoods, take place in the resale market. New home construction, in contrast, is dominated by builders developing large tracts of suburban land. (Statistics Canada’s New Housing Prices Index excludes condominium developments that would be more prevalent in urban centres.)

Based on national balance sheet data, the aggregate value of Canadians’ holdings of residential buildings (i.e. excluding land) has doubled over the past decade. However, the value of the land on which these structures stand has increased two-and-a-half fold. Land values now account for close to 50% of the estimated value of residential properties, up from less than 40% in 1990.

The divergence in new and resale home prices is seen in most markets across the country, but to varying degrees. The biggest gap has opened up in British Columbia, where the lack of developable land in its largest city is a major contributor to its record high home prices. On the other hand, new home prices have largely tracked resale prices in Alberta and Saskatchewan, where a massive influx of population attracted to the region’s booming economy, and the inherent lag in adding sufficient new housing stock, fuelled across-the-board appreciation.

Source: Scotia Economics

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James Chung

Founder & Editor in Chief of Hello Vancity magazine. Email [email protected]

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