Be Aware Of Policy Change at the Fed
As we provide lots of commentary on the maturing economic cycles and monetary policy across the globe, we thought it was worth highlighting some points from Fitch’s recently published Global Housing Update and its useful insights into how the global housing markets are faring. Aside from being a hot topic at dinner parties from Sydney to Santiago, the residential housing market has become increasingly regulated (and politicised) and represents a good barometer on the health and confidence of households.
Fitch paints a positive 2018 outlook for house prices across 19 of the 22 jurisdictions covered; stable GDP growth, low unemployment and the impact of monetary policy in providing strong, cheap credit continue to create a fertile environment for housing demand globally. US mortgage delinquencies are at pre-crisis levels and house prices in even the most depressed European countries – Greece and Italy – look to be near bottoming out. Growth forecasts for 2018 in Europe are averaging 3-5% with Ireland running hot at 10% and Greece bringing up the rear with a mild decline of 2%. Looking west, the US and Canada are forecast to post positive numbers at approximately 5% and further south, Brazil and Mexico are just behind at 4%. Most jurisdictions have growing but modest new housing supply, the US for example is still constructing at levels below the 30 year average.
Of the three outliers Fitch highlights, the UK will be the least surprising where Brexit and Buy-to-Let changes continue to create an uncertain backdrop. In addition, Norway has seen falling immigration and excess supply in Oslo create weakness, whilst sharp house price growth in some Canadian cities is raising concerns of a correction as rates rise.
So when we consider what happens next, we must start with global QE programmes and onset of tapering. We don’t feel that the pace of rate rises will present material short term performance issues in most countries, including the most vulnerable floating rate mortgage markets like Australia, Italy and Spain. Countries where long term fixed rate mortgages dominate lending, such as the US, Germany, France and the Netherlands have seen rates drop dramatically which will benefit borrower affordability over the long term.
Falling rates have created an intense period of refinancing, most noticeably in France where prepayment rates in 2016 rose to near 100%. This has been great for banks’ transaction based fees but leaves questions about how they compete after such a heavy period of churn. Fitch highlights a concern that volumes in these jurisdictions may be sought through competition on lending standards.
A common response by policy makers during heated house price growth has been protectionist measures. Take for example the 3% additional stamp duty payable on second homes in the UK, the recently doubled 8% foreign buyers tax in New South Wales or the capital controls in China. Household debt is not however increasing at dramatic pace, two notable exceptions being Australia where increases are from a level high relative to other western countries and in China where the most aggressive increases are from a low starting point. Fitch however feels that fundamental strengths have outweighed the rolling out of policy speed bumps. Fundamentals have indeed been powerful, however we expect strengthened regulatory frameworks to provide a break on widespread excesses, for example the ban on self-certification of incomes for UK borrowers and the strict Code of Conduct in the Netherlands.
Some other global housing trends have risen out of the financial crisis. The void left by traditional financial institutions has been filled by non-banks, often backed by private equity firms. 6 of the top 10 US lenders by volume are now non-banks )a far larger market share than in the UK). The other has been a job driven demographic trend where the shoots of house price recoveries have sprung up in major cities but this has distorted both ailing regional and national statistics. Good examples of this trend exist in London, Sydney, Melbourne, Toronto, Shanghai, Beijing and Amsterdam. So whilst affordability broadly remains strong, house price to income ratios are stretched in some metropolitan areas. Labour markets themselves are changing with more people choosing flexible self-employment. Traditional banks have often struggled with atypical home purchasers, a common USP for new non-bank lenders with more manual underwriting approaches.
The outlook then is positive for the coming quarters globally, with fundamentals likely to persist in supporting house prices. If Fitch are correct in assuming the policy makers have had limited impact in stemming excess growth, it will be interesting to see how they play the next hand.