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World’s most bubbly housing markets flash 2008 style warnings

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The West End is seen on the mountain-backed skyline of Vancouver, British Columbia, Canada September 30, 2020.
— REUTERS/Jennifer Gauthier/File Photo

Real estate prices around the world are flashing the kind of bubble warnings that haven’t been seen since the run up to the 2008 financial crisis, according to Bloomberg Economics.

New Zealand, Canada and Sweden rank as the world’s frothiest housing markets, based on the key indicators used in the Bloomberg Economics dashboard. The U.K. and the U.S. are also near the top of the risk rankings.

“A cocktail of ingredients is sending house prices to unprecedented levels worldwide,” economist Niraj Shah wrote in the report. “Record low interest rates, unparalleled fiscal stimulus, lockdown savings ready to be used as deposits, limited housing stock, and expectations of a robust recovery in the global economy are all contributing.”

Stay-at-home workers in need of more space and tax incentives offered by some governments to home buyers are also stoking demand.

Bloomberg Economics’ dashboard compiles five indicators to estimate a country’s ‘bubble rank,’ with a higher reading indicating greater risk of a correction. Among the indicators, price-to-rent and price-to-income ratios help assess the sustainability of price gains. House price growth measures current momentum.

For many countries in the Organisation for Economic Co-operation and Development, the price ratios are higher than they were ahead of the 2008 financial crisis, according to the Bloomberg Economics analysis.

Even as risk metrics rise, with interest rates still low, lending standards generally higher than in the past, and macro-prudential policies in place, the trigger for a crash isn’t obvious, according to the analysis. Shah said the period ahead will more likely be characterized by cooling rather then collapsing.

Yet the risk is greater when there’s a synchronized boom in house prices — as is the case in the current cycle, according to Shah.

“When borrowing costs do start to rise, real estate markets — and broader measures put in place to safeguard financial stability — will face a critical test,” Shah wrote. — Bloomberg



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