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Investment Analysis

Global housing boom shifts focus

by GLOBAL PROPERTY GUIDE

Jan 06, 2008


The global house price boom continues in 2007, albeit at a much slower pace and with different set of countries.

A dramatic slowdown has taken place in several countries in Europe. House prices in Estonia, 2005 and 2006's star performer, rose only 5.68% y-o-y to Q1 2007, dramatically lower than the 77.52% y-o-y increase to Q1 2006.

Higher interest rates and an overheating market were the main causes of the slowdown. The key interest rate of the European Central Bank (ECB) has been raised nine times to 4% in June 2007, from its historic low of 2% in Nov 2006.

Other European countries that experienced lower house price changes y-o-y to Q1 2007 than in 2006 included France, Sweden, Ireland, Spain, Greece, the Netherlands, Switzerland and Portugal.

Ireland's annual house price growth slowed to 7.44% y-o-y to Q1 2007, a deceleration from 12.07% y-o-y to Q1 2006. Apart from the higher interest rate, the heating issue on Stamp Duty also contributed to the decline.

The US house price rise also slowed to 4.07% y-o-y to Q1 2007, down from 12.78% y-o-y to Q1 2006.

The US Federal Funds rate has risen sharply from its low of 1% in May 2004 to its current level of 5.25%. The Fed has kept the rate unchanged since June 2006. This rate increase has meant trouble for sub-prime borrowers, leading to delayed payments and foreclosures.


Strong rises in non-Eurozone Europe

Interestingly, European countries which have not adopted the Euro have experienced stronger house price rises y-o-y to Q1 2007, than countries within the zone. Such is the case of Latvia which plans to adopt the Euro in 2010. Latvia took the lead in house price increases y-o-y to Q1 2007.

Latvia's capital, Riga, experienced a remarkable appreciation of 61.91% y-o-y to Q1 2007, higher than the 35.64% y-o-y increase to Q1 2006. However, recent data from Latio, Latvia's leading research-oriented real estate agency, show that prices have started to fall in Q2 2007.

Lithuania's house prices rose by 26.32% y-o-y to Q1 2007, up from 25% y-o-y to Q1 2006. Lithuania has recently increased its long-term interest rate to 4.6% in June 2007, from 4.2% in March 2007. The European Commission rejected Lithuania's bid to adopt the euro in 2007 because its inflation breached the required limit.

House prices in Norway were up by 16.69% y-o-y to Q1 2007. Norway rejected EU membership in a referendum in 1972, and again in 1994. Positive factors such as continued economic expansion and the strength of the labour market overpowered the pull exerted by higher interest rates.

After taking a breather in 2005 and early 2006, house price growth in the UK accelerated to 9.25% y-o-y to Q1 2007, up from 5.3% y-o-y to Q1 2006. Particularly, Northern Ireland and London saw double-digit y-o-y house price increases in Q1 2007, at 57.6% and 14.3%, respectively.

Cyprus, which is set to adopt the Euro starting January 2008, is in a middle of a housing boom with house prices rising by almost 10% y-o-y to Q1 2007. Liberalization of the financial sector, a decrease in interest rates, and increased demand for higher quality housing and second homes were the main drivers for the price boom.


Now it's Asia Pacific's turn

The house price boom is now moving towards the Asia-Pacific region. Property prices in countries affected by the Asian Crisis are showing strong signs of recovery, prompting fears that a property bubble is developing anew in the region (see related story).

Property prices in the Philippines, Singapore and South Korea rose by more than 10% y-o-y to Q1 2007, higher than in 2006. Although Japan registered a nationwide land price drop of 1.48%, land prices in its six major cities increased by a remarkable 7.75% y-o-y to Q1 2007, suggesting a real recovery from the 15-year house price downturn. There are no official house price statistics in Japan, so land prices are used as a proxy.

Australia has recovered from its 2004-2006 slowdown. Despite higher interest rates, house prices rose by almost 8% y-o-y to Q1 2007, from 4% y-o-y to Q1 2006.

New Zealand's house prices rose by 11.36% y-o-y to Q1 2007, significantly up from 9.55% y-o-y to Q4 2006. This is despite the fact that the Reserve Bank of New Zealand (RBNZ) has increased interest rates since early 2004 to cool down the housing market.

Elsewhere, South Africa saw 16.74% house price increases y-o-y to Q1 2007. South Africa's house prices have been escalating for seven continuous years, with price increases peaking at 30% in 2004.

Canada's house prices moved forward in Q1 2007, thanks to strong economic growth, low mortgage rates and large net immigration. House prices rose 9.30% y-o-y to Q1 2007, up from 7.55% y-o-y to Q1 2006.


The laggards

Thailand and Israel, after suffering from political crises, have not yet recouped the confidence of investors. This resulted in a drop of 5.09% y-o-y to Q1 2007 in Thailand's house prices, down from an 8.03% y-o-y increase to Q1 2006. Israel's house prices fell by 10.52% y-o-y to Q1 2007, due to increased political and security concerns in the Middle East.

Portugal's sluggish economic expansion exacerbated the effect of higher Euro interest rates. House prices have risen by a meager 1.14% y-o-y to Q1 2007, after an already low growth rate of 2.17% y-o-y to Q1 2006.


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