Epic Housing Booms Meet Their Match in Australia, Canada, New Zealand
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Epic Housing Booms Meet Their Match in Australia, Canada, New Zealand

After multiyear surges for homeowners, property prices are at particular risk

Mon, Nov 7, 2022 8:38amGrey Clock 4 min

SYDNEY—Australia, New Zealand and Canada are home to three of the biggest property booms in recent history, having survived the global financial crisis, recession and Covid-19 pandemic. They might have finally met their match, however, at the hands of an unprecedented pace of global monetary tightening.

While home prices have been strong around the world for decades, these three stand out. They dodged much of the collapse in prices that hit the U.S. ahead of the global financial crisis, and the booms have gathered even more steam during the pandemic. Since 1990, home prices in Australia, New Zealand and Canada are up 532%, 602% and 331%, respectively, compared with 289% for the U.S., according to one measure from research firm Oxford Economics.

All three, however, are particularly sensitive to monetary tightening. Unlike in the U.S., where people often have long-term, fixed-rate mortgages that are protected against rate increases, many home loans in Australia, New Zealand and Canada are effectively at a floating rate, meaning that mortgage payments go up as rates rise.

“Overall, this is the most worrying housing market outlook since 2007-2008, with markets poised between the prospect of modest declines and much steeper ones,” Oxford Economics wrote in a recent note.

While the firm’s concerns apply globally, it said Australia, New Zealand and Canada were among the markets most at risk for large price declines. It estimates home prices in Canada could fall 30% and New Zealand prices could drop 20%. In Australia, recently released documents show that central bank economists fear house prices could fall by as much as 20%.

The rising rates are expected to hit homeowners fully in those three countries starting next year. Many home loans in these markets have a fixed-rate period for a few years, so mortgages taken out soon after the pandemic have yet to be reset to more-expensive current rates.

“2023 looks ominous,” said Ron Butler, who runs the Canadian mortgage broker Butler Mortgage.

Chris Joye, chief investment officer at Coolabah Capital in Sydney, estimates the city is seeing the biggest monthly falls in house prices since 1983. Using the central bank’s house-price forecasting model, he says if interest rates hit 4.25%, house prices could plummet 40%. Money markets are currently pricing in a peak central bank policy rate above 4%, higher than the current 2.85%.

Australia is “a harbinger of what awaits the rest of the world,” Mr. Joye said. “The Aussie housing market is certain to suffer a record drawdown.”

In New Zealand, around 45% of home loans end their fixed-rate period within 12 months, said Kelvin Davidson, chief property economist at the real-estate data firm CoreLogic. Many economists in New Zealand expect interest rates to peak above 5% after recent inflation numbers were higher than expected. That could push one-year fixed-mortgage rates to 7%, which would be unaffordable for many homeowners and could force them to sell rather than refinance.

In Canada, some housing-market participants are worried about so-called trigger points and trigger rates. While many mortgages have variable rates, Canadian lenders often offer fixed payments to keep things predictable, and allocate more or less of the monthly payment toward interest depending on prevailing rates at the time. If rates keep rising, the fixed payment at some point won’t be enough to cover all the interest, according to the Canadian financial-information website Ratehub.ca.

Eventually, some borrowers might be required to increase their monthly payments, make a lump-sum payment or convert to a less favourable fixed-rate mortgage, according to Ratehub.ca. All of that threatens to add financial strain to households in coming months, given that Canada’s central bank is poised to keep raising rates.

Unlike what happened in the run-up to the financial crisis, large-scale mortgage defaults are improbable this time, according to Oxford Economics. That is partly because many people have amassed savings during the pandemic that will provide a cushion. Unemployment in all three countries is at multi-decade lows. Even if home prices fall some 20% to 30%, that wipes out just a couple of years of gains.

Stress testing of lenders by some central banks suggests house prices would need to fall a long way before threatening financial stability, given that banks have built up large capitalisation buffers since the financial crisis.

New Zealand’s central bank, for example, recently published bank stress testing and concluded the sector is well placed to withstand a stagflation scenario of high inflation and low or negative economic growth. The banks were even able to withstand a scenario in which house prices fall by 47% from the peak in November 2021, and the unemployment rate jumps to 9.3%.

Even if a crisis isn’t in the cards, the outlook for many homeowners is grim. Natalie Bell, 40 years old, who works in school administration, said monthly mortgage payments on her four-bedroom brick home in a Sydney suburb are expected to rise from about 2,500 Australian dollars, the equivalent of $1,600, to A$3,600. Late last year, her family secured a fixed rate of 1.9% for two years, but that will likely bump up to well over 5% in October next year.

Ms. Bell said the family would sell the house if payments got too expensive, but she hopes it doesn’t get to that.

“It’s a bit stressful as we don’t know how much they will keep going up,” Ms. Bell said. “We did take out the mortgage knowing rates would fluctuate, and budgeted for that, but there is always a point where it becomes too much.”


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Hong Kong Takes Drastic Action to Avert Property Slump

The city’s real-estate market has been hurt by high interest rates and mainland China’s economic slowdown

Fri, Mar 1, 2024 3 min

Hong Kong has taken a bold step to ease a real-estate slump, scrapping a series of property taxes in an effort to turn around a market that is often seen as a proxy for the city’s beleaguered economy.

The government has removed longstanding property taxes that were imposed on nonpermanent residents, those buying a second home, or people reselling a property within two years after buying, Financial Secretary Paul Chan said in his annual budget speech on Wednesday.

The move is an attempt to revive a property market that is still one of the most expensive in the world, but that has been badly shaken by social unrest, the fallout of the government’s strict approach to containing Covid-19 and the slowdown of China’s economy . Hong Kong’s high interest rates, which track U.S. rates due to its currency peg,  have increased the pressure .

The decision to ease the tax burden could encourage more buying from people in mainland China, who have been a driving force in Hong Kong’s property market for years. Chinese tycoons, squeezed by problems at home, have  in some cases become forced sellers  of Hong Kong real estate—dealing major damage to the luxury segment.

Hong Kong’s super luxury homes  have lost more than a quarter of their value  since the middle of 2022.

The additional taxes were introduced in a series of announcements starting in 2010, when the government was focused on cooling down soaring home prices that had made Hong Kong one of the world’s least affordable property markets. They are all in the form of stamp duty, a tax imposed on property sales.

“The relevant measures are no longer necessary amidst the current economic and market conditions,” Chan said.

The tax cuts will lead to more buying and support prices in the coming months, said Eddie Kwok, senior director of valuation and advisory services at CBRE Hong Kong, a property consultant. But in the longer term, the market will remain sensitive to the level of interest rates and developers may still need to lower their prices to attract demand thanks to a stockpile of new homes, he said.

Hong Kong’s authorities had already relaxed rules last year to help revive the market, allowing home buyers to pay less upfront when buying certain properties, and cutting by half the taxes for those buying a second property and for home purchases by foreigners. By the end of 2023, the price index for private homes reached a seven-year low, according to Hong Kong’s Rating and Valuation Department.

The city’s monetary authority relaxed mortgage rules further on Wednesday, allowing potential buyers to borrow more for homes valued at around $4 million.

The shares of Hong Kong’s property developers jumped after the announcement, defying a selloff in the wider market. New World Development , Sun Hung Kai Properties and Henderson Land Development were higher in afternoon trading, clawing back some of their losses from a slide in their stock prices this year.

The city’s budget deficit will widen to about $13 billion in the coming fiscal year, which starts on April 1. That is larger than expected, Chan said. Revenues from land sales and leases, an important source of government income, will fall to about $2.5 billion, about $8.4 billion lower than the original estimate and far lower than the previous year, according to Chan.

The sweeping property measures are part of broader plans by Hong Kong’s government to prop up the city amid competition from Singapore and elsewhere. Stringent pandemic controls and anxieties about Beijing’s political crackdown led to  an exodus of local residents and foreigners  from the Asian financial centre.

But tens of thousands of Chinese nationals have arrived in the past year, the result of Hong Kong  rolling out new visa rules aimed at luring talent in 2022.


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