Unabashedly unaffordable: Global housing markets on the edge

BMO Global Asset Management

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BMO Global Asset Management Global Investment Insights Of course this whole pack of negatively geared cards relies on one thing — ongoing house-price inflation. If house prices falter (and, dare we say it, start to fall) these heavily leveraged “investments” are going to start looking pretty silly. Group psychology can turn on a penny and a few forced sales can suddenly turn into a deluge. Selective amnesia seems to afflict the general public when it comes to property. They quickly forget that prices can and do fall. Take a look at what happened in the U.S.

in 2007 - 2009 (and Spain, Portugal, Ireland, Greece, the UK et al.) In the UK, where the decline in prices was milder than in many other countries, it was still sufficient to rattle the teeth of heavily geared home-owners and give many bankers heart palpitations. Look at the chart to the right. The pre-recession peak for an average of all-UK prices was in September 2007 at £190,032 and the post-recession low was £154,452 in March 2009 — a fall of 19%. In the prosperous South East (around London) average prices fell by 20% over the same period. In the U.S.

the average peak to trough fall was around 21% (all-U.S. data) — and that was sufficient to take the world economy to the edge. Of course, thanks to quantitative easing and other unorthodox measures, prices then picked up and passed pre-recession highs — and that is precisely why we are concerned! First quarter 2017 Average house prices — all UK Aggregate data for OECD economies (output per worker) 225,000 215,000 205,000 195,000 £ Note: December 2016 average levels: UK: £ 219,544 London: £483,803 South West: £242,808 England: £236,423 Wales: £148,177 South East: £316,026 Scotland: £141,553 185,000 175,000 165,000 155,000 145,000 135,000 125,000 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Source: UK Office for National Statistics We have tended to focus on Australia in this diatribe but as the country’s largest five cities are all featured in Demographia’s Top 20 “median multiple” list we feel it merits special mention.

Don’t think we are complacent about the many others that are in the “severely unaffordable” category, because they all induce a troubled sleep. All investments involve risk, including the possible loss of principal. Foreign investing involves special risks due to factors such as increased volatility, currency fluctuation and political uncertainties. High yield bond funds may have higher yields and are subject to greater credit, market and interest rate risk than higher-rated fixed-income securities. Keep in mind that as interest rates rise, prices for bonds with fixed interest rates may fall.

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