Castles made of sand
01-04-2014
Monetary policy may call an end to the house-price party
HOUSE prices are now rising in 18 of the 23 countries we track across the globe, compared with just 12 a year ago. America tops our table: the Case-Shiller index released on New Year’s Eve reported price increases of 13.6% in the year to October 2013. Homes have risen in value by 24% since their March 2012 trough, but they remain 20% below their peak in April 2006.
Builders started work on over 1m new homes in America in the year to November, for only the second time since the financial crisis ended. But this is far short of the 2.3m recorded in January 2006, 
and below the long-run average of 1.5m. In all, American property is enjoying a recovery but not a bubble.
The Federal Reserve’s decision to start tapering its buying of bonds with newly-created money (ie, to scale back the policy commonly known as quantitative easing, or QE) by $10 billion to $75 billion a month from January may take some wind out of house sales. Although mortgage rates are rising, thanks to higher bond yields, housing remains affordable. Prices are now at or around fair value according to The Economist’s measure, which compares prices with the long-run average of rents and personal incomes.
Prices in Britain increased at their fastest rate for three years in October, fuelling fears of a housing bubble (and subsequent crash), particularly in London where prices increased by 12%. Although by our measure housing is overvalued against both rents and income, Britain did not suffer a housing crash on the scale of America’s, largely because supply is so tight. Britain’s government scrapped house-building targets in 2010. Projections of new-household formation suggest 290,000 new homes will need to be built every year through to 2031. But in the 12 months to March 2013 housing completions fell to 135,000, their lowest level since records began in 1949.
The north-south divide in the euro area continues: in Greece, Spain and Italy house prices declined by between 5% and 10%. However, the market has finally bottomed out in Ireland: after halving over six years, prices are now 9% above their March low. Prices in Germany, which has the lowest home-ownership rate in the EU at 53%, are rising at the fastest rate since reunification, although housing is still undervalued against both rents and income.
Brazil, which hosts the football World Cup in June, is also having a housing boom. Prices increased 13% in the 12 months to November and in Rio, which hosts the Olympics in 2016, they have trebled since 2008. Fears grow of a bubble in China, led by overdevelopment and low occupancy. According to The Economist’s index, based on official figures from 70 Chinese cities, prices increased by 8.7% in the year to November 2013. India may follow suit: prices across 15 cities with a total population of 100m increased 7% in the third quarter of 2013. But Canada appears to have been successful in cooling its market: its house-price inflation has reduced to 3.4%, though homes still look expensive.
From the print edition: Finance and economics