It was a dismal year for house prices, according to publicly-available house-price time-series for the year 2008. Most worrying is that the downturn is still accelerating.
The collapse of the world’s housing markets in 2008 can be seen from three points of view, and unfortunately, all of them reinforce the bad news.
- During 2008, the downward price momentum accelerated, as compared to 2007.
Only 2 countries saw positive momentum in 2008 (a slower downward house price movement than last year, or faster upward movement), while 28 countries saw their housing market momentum deteriorating, compared to the previous year. The two countries with a positive momentum were Germany and Switzerland (please see accompanying tables, see column with the arrows).
- During 2008, house prices fell in most countries.
During 2008 only 8 out of 32 countries saw house prices rise, after adjustment for inflation, while 20 countries experienced house price falls.
In contrast, during the year 2007, the downturn was just beginning, and only 6 countries saw house prices fall, while 24 countries saw house prices rise (all figures inflation-adjusted).
Many house-price falls during 2008 were extremely severe. Countries with house price falls of over 10% during 2008 were Latvia (Riga) (37%), Lithuania (Vilnius) (27%), the US (20%), the UK (18%), Iceland (16%), Ireland (12%), and the Ukraine (Kiev) (12%) (all figures inflation-adjusted).
- During the final quarter (Q4) of 2008, the downward price momentum significantly accelerated, as compared to Q3, suggesting that the situation is deteriorating.
During 2008’s final quarter, 9 countries saw house price falls of 5% or more during just that quarter. Price drops of more than 10% during this single quarter occurred in three countries - in Latvia (Riga), which saw price falls of 15%, in Ukraine (Kiev) (13%), and in Hong Kong (15%). Other countries with Q4 house-price falls of 5% and over, included the UAE (8%), Lithuania (7%), Iceland (7%), Singapore (6%), Bulgaria (5%), and the UK (5%) (all figures inflation-adjusted, except UAE). These price falls were much greater than during the previous quarter, Q3. During that previous quarter, only two countries experienced house-price falls (inflation-adjusted) of 5% or more, and no countries experienced house-price falls of more than 10%.
Europe has major problems
The Baltic countries of Latvia and Lithuania suffered the hardest price falls both in nominal and real terms. In Riga, Latvia, the average price of standard-type apartments plunged 37% during 2008. Prices have been going down in Latvia since late 2007, after a remarkable increase of about 70% in 2006. The most alarming decline took place in the 4th quarter, when prices declined by 15%, the steepest quarterly drop in real terms in any country. These price falls were triggered by increased interest rates, and by the tightened credit rules which Latvia imposed in 2007.
Average prices of apartments in Vilnius, Lithuania, fell by 27% during 2008. House prices started slowing in mid-2007, and crashed in early 2008.
House prices in the UK plummeted by 18% in 2008. Although mortgage interest rates dropped slightly, to 4.48% in December 2008, the number of loan approvals for house purchases fell 58% in 2008.
North America’s woes
In the US, the centre of the global financial crisis, in 2008 house prices fell 20% according to the Case-Shiller house price index, which emphasizes urban areas. OFHEO and FHFB figures, which are associated with Fannie Mae and Freddie Mac loans and have somewhat lost credibility, suggest a smaller decline of 6% and 3% respectively, during 2008. The US government recently approved a $ 787 billion economic stimulus package, of which $275 billion will be allocated to rescue the ailing housing market.
|Source: Various series, data descriptions and sources here|
Canada has been much less affected than the US.
Pacific heads down
Asia no longer insulated
Housing markets in Asia have not been insulated. Singapore, Hong Kong and Philippines recorded house price falls during 2008.
Singapore’s private residential prices dropped 9% during 2008, in sharp contrast to the 26% price increase of experienced during 2007. The developed countries’ economic troubles adversely affected Singapore’s exports, and during 2008, output in the manufacturing sector, particularly of electronics, precision engineering and chemicals, shrank by 10.7%. Singapore was officially in recession in Q3 2008.
Hong Kong has been badly hit by the crisis. House prices were down by an average of 6% in 2008. But during the last quarter, Hong Kong experienced a severe decline in prices of 14%.
In Makati, Philippines, prime 3-bedroom condominium prices fell by 2% during 2008, after an 11% price rise during 2007. Nevertheless construction of high-rise residential buildings continues, with residential condominium stock rising by 7% during 2008, according to Colliers Philippines.
Japan recorded modest Tokyo condominium price rises of 1.2% during 2008. On the other hand, land prices in Japan’s six major cities fell by 6% y-o-y to Sep-2008.
In Shanghai, China, house price rises slowed to 5% y-o-y by the end of 2008, after peaking at 30% y-o-y to May 2008. However Shanghai is likely to be somewhat exceptional, and Xinhua News Agency reported house prices declines in 70 major cities during 2008. Shenzhen suffered the hardest fall, with prices down by 18% during 2008
UAE on shaky ground
In Dubai, UAE, despite the bleak global picture, saw surprisingly large dwelling price rises of 41% during 2008. However during the year’s final quarter, prices fell by 8% in nominal terms. This downturn is attributable to strongly tightening lending criteria, an increase in interest rates, multiple layoffs, and alarm among buyers.
Forecast: No recovery in 2009
History suggests that in a crash, housing markets take many years from peak year to full recovery. In view of this and of the pessimistic IMF forecast for the global economy, no real recovery is likely in the global housing markets this year.
The IMF has predicted that the world economy will grow by 0.5% in 2009, the lowest level in 60 years. GDP in advanced economies is expected to decline by 2% during 2009. The United Kingdom and Japan will be hit the hardest. Output in the UK may contract by 2.8%, while Japan’s may fall by 2.6%.
Growth in emerging economies is expected to slow to 3.3% in 2009, down from 6.3% in 2008. Developing Asia is forecast to be the least affected, with growth of 5.5%. China’s economy is predicted grow by 6.7% in 2009, but this is a substantial decline from 9% growth during 2008.
We cannot be optimistic for five reasons:
- Valuations still clearly remain stretched in most countries, in terms of price/rent ratios.
- Economic growth is slowing or negative in many countries, which is negative for housing values.
- There are no signs that banks are becoming more willing to lend.
- The unprecedented nature of the financial system’s collapse has greatly added to the difficulties facing the world’s housing markets.
- Some national governments are experiencing difficulty in refinancing their national debt, putting their currencies under pressure. Currency instability is likely to aggravate housing sector problems in countries where many loans were taken out in a foreign currency.
The positive news is that the US government and several others are acting with vigour, as has the IMF. Nevertheless, there is a long tough road ahead.
|Source: Various series, data descriptions and sources here|