This article is from the Australian Property Journal archive
MOST housing markets in advanced economies have been in retreat in 2023, but further significant corrections and further monetary policy tightening are unlikely, according to Oxford Economics, and lower affordability could be reversed with the help of a gradual rise in incomes.
In a research note to clients, Oxford Economics said the labour market, rather than the financial sector, “is where you should look for risk factors this time around”.
“Lower leverage, higher creditworthiness, and credit conditions that are likely to ease for households going forward will work to ensure that affordability is gradually restored through rising incomes rather than further house price corrections. This expectation does hinge on a benevolent labour market outlook though,” the note said.
Recent house price pullbacks in advanced economies have reversed some of the stratospheric gains of the pandemic-recovery era – it cited “especially impressive” prices in New Zealand – but not all.
“Affordability is still well below long-term averages in most advanced economies and with a global economic slowdown looming, one might understandably expect further house prices corrections.
With more disappointing economic data coming in across advanced economies, further policy tightening looks ever unlikelier, Oxford Economics said.
“We are witnessing an – albeit mild – retreat in terminal policy rates across major central banks. In the eurozone, bank lending standards for households have already stopped progressively tightening and have formally turned the corner towards easing, though they are still relatively tight in the US.
“A word of caution is due here. Cross-country comparisons of bank lending standards are dangerous as survey questionnaires vary widely. It’s also worth noting that surveyed loan officers are heavily biased towards reporting tightening standards, giving the impression that these have hardly ever gotten easier since the GFC.
“That said, it does seem that the worst is behind us in terms of household sector credit.”
Oxford economics said that even if mortgage rates now look both punishingly high – and dramatically higher than what we have been used to in the last decade or so – it might not be relevant for a significant proportion of both households in general and homeowners in particular.
“It might skew other indicators of the housing market, bringing volumes down as people are reluctant to move and negotiate a new mortgage, but it affects house prices less than what you might expect.”
Another significant factor in the development of house prices will be household leverage. The US and UK, where household indebtedness was highest before the GFC, have since seen significant deleveraging in their household sectors.
“The pandemic crisis and the consequent sharp but temporary fall in GDP have only briefly pushed ratios of household-debt-to-GDP upwards. But the trend is still that of deleveraging. Bucking the trend, household indebtedness in Australia, Canada, and Scandinavian countries have continued to rise (coincidentally these are also mostly countries that have seen the highest rise in house prices recently). This is not our baseline forecast, however.
“Higher house prices will inevitably mean higher mortgage loans and thus higher indebtedness. Once the threshold is reached and indebtedness rises above sustainable affordability, a slowdown in the business cycle will cause forced sales and a consequently drops in house prices. In that sense, the current levels of household indebtedness might be a problem for Australia, Canada, and the Scandies, whose household sectors haven’t deleveraged post-GFC. Conversely, it’s less of a problem in countries where household debt is now lower.”
Price-to-rent and price-to-income ratios – broadly-used indicators of housing market pressures – have both undergone sharp rises since the post-pandemic recovery began. Affordability (house price-to-income ratio) worsened, but not as much as the profitability of owning and renting a house rose.
Oxford Economics noted that country-by-country, the picture is more nuanced, with English speaking countries tend to fare worse. Last available price-to-rent ratios are above the long-term averages and around the averages for the 2020s, and price falls in the third quarter of this year mean that some of the pressure has already been relieved.
