UK not alone in seeing pressure on house prices
By Emily Cadman
Tourists take photographs as they stand in front of the Sydney Opera House and Harbour Bridge on a hazy day October 21, 2013. According to New South Wales (NSW) government figures, poor air quality due to bushfire smoke will affect many areas of NSW including Sydney and is expected to last until a change in forecast later in the week. REUTERS/David Gray (AUSTRALIA - Tags: TRAVEL ENVIRONMENT) - RTX14IIH
Double digit house price rises, an OECD warning that the market needs cooling, concern about housing affordability – sound familiar? But this is Australia, not the UK.
It is a reminder that the UK is not alone in struggling with the combination of record low interest rates, a strengthening economy and changing demographics combining to put intense pressure on house prices.
Nor is the picture unfamiliar for Mark Carney, Bank of England governor, whose home country, Canada, has also received an OECD warning on the need to reduce housing-related risks. Sydney and Toronto, like London, have seen an influx of foreign money pushing city prices substantially higher than the country as a whole.
Both Australia and Canada have mortgage guarantee schemes and showcase two options for exiting from this element of Help to Buy: privatise the operation entirely, like Australia, or set up a specific government body, while allowing some private operators as in Canada.
Australia’s loan insurance book was privatised in 1997 and, while the private companies are heavily regulated, there is no government guarantee.
In Canada, the government mortgage body still operates the majority of the market and the state provides a backstop guarantee for the two private sector players.
The US federal mortgage agencies Fannie Mae and Freddie Mac were initially proposed as temporary programmes
- Richard Batley, Lombard Street Research
One concern for the UK scheme’s critics is whether it is inevitable that Help to Buy will become a permanent part of the market – with the government ultimately forced to step in if there is a crash.
“The US federal mortgage agencies Fannie Mae and Freddie Mac were initially proposed as temporary programmes,” said Richard Batley of Lombard Street Research, the economic consultants.
Canada has been at the forefront in using regulatory tools to try and prevent housing bubbles. There, lenders are prohibited from providing loans without insurance for ratios in excess of 80 per cent and this limit has been adjusted a number of times in attempts to cool the market. It has also acted to limit the maximum term of loans.
Price indices have presented wildly contrasting pictures of the health of the housing market – according to some the boom is back, while to others the slump staggers on
Yolande Barnes, director of Savills World Research, the analysis arm of the real estate services provider, said it was tempting to see Canada’s relatively smooth growth “in excess of inflation but not excessively so” as a sign that macroprudential policy might have had some effect.
A study out this month from investment bankers Goldman Sachs on the use of macroprudential tools in 20 OECD countries estimates tightening measures, such as reducing the availability of high loan-to-value mortgages, can reduce the rate of house price growth by 1 per cent a year. This change is statistically significant but the question remains whether such interventions alone are sufficient.
Goldmans’ analyst Hui Shan warns that if the roots of housing bubbles are related to psychology, “perhaps neither monetary policy nor macroprudential housing policies can be effective in stopping house prices from rising significantly above economic fundamentals”.