The US Federal Reserve probably regretted the choice of location for their end of summer conference this year. With a name like ‘Jackson Hole’ it struck a loud chord with the plight of the financial markets. Jackson Hole was the dateline of the news wire items emanating out of the conference including coverage of Robert Shiller’s lecture on 31st August, headlined ‘Housing woe could trip world slump‘.
Reading on it quickly becomes clear that the Yale professor isn’t predicting anything as big as the Great Crash and the Slump; it is ‘just’ house prices that he thinks may be due for a pummelling. At least in the case of the United States there seems no doubt that there is a substantial problem of over-supply with Shiller’s own S&P/Case – Shiller home price index registering declines of 1.6% and 3.2% respectively in the first two quarters of 2007.
However, it seems a big leap to develop a thesis that property worldwide is under threat as a result. There are enough varying circumstances in different parts of the world to give a measure of protection for property investments in a number of countries.
In the UK, for example, considerable attention has been given to the likely travails in the City of London following on from a drawn out crisis in the financial markets with the threat of reduced annual bonuses and even lay-offs. While there is no doubt that cuts in bankers discretionary spending power will have an effect at the top end of the housing market in the South of England, it’s important to remember that housebuilding activity has fallen to levels not seen since the 1920s and a large of part of the country has insufficient homes to meet demand.
There is no particular reason to expect a slump in house prices or, for that matter, a return to rapid return to steep residential property price inflation any time soon. The latest survey by the Halifax highlighted a slowing rate of increase. Furthermore, although the arithmetic for buy- to-let is no longer so attractive, the rental market hasn’t gone away, especially in London.
Looking afield you can see a similar picture of different countries being at different stages of the economic cycle with property markets to match. Recently, Canadian and Chinese property markets where for different reasons residential real estate is in a quite different phase from that obtaining in the US. There is no suggestion that the property markets of oil exporters like the UAE or Russia are going to burst in the near future despite speculative effects.
Moreover there are some areas that have experienced very little growth in residential property prices. Germany has experienced a 5% fall in house prices since 2002 while Austria, Finland and Portugal have only achieved slight increases. Mind you, talk of IKB having losses totalling €700bn (as reported in the Daily Telegraph on 4th September might frighten even the most courageous investor! Countries such as Thailand and Malaysia are only now moving out from under the shadow of the Asian crisis of the late nineties. It remains to be seen if they will be affected by the gloomy news currently coming out of Japan. However, Japan’s has had its own deflationary problems for many years now and SE Asian economies may be as much affected by growth in China and India as by problems in first world economies.
In conclusion, it still seems wisest for the banks to be made to come clean about the collateralised debt obligations they are holding or paying interest on before the central banks loosen interest rate policy any further or ordinary investors give up on real estate.