Property bubbles may burst, OECD warns

London

THE Organisation For Economic Cooperation and Development (OECD) has issued a sharp warning that property bubbles in key member nations could implode.

Following on from the warning in the OECD's November report, Catherine Mann, the organisation's chief economist, has warned that a "number of countries", including Australia, New Zealand, the UK, Canada, Sweden, Germany and Switzerland, had "very high" commercial and residential property prices that were "not consistent with a stable real estate market".

The boom in real estate prices has pushed up price-to-rent ratios to record highs in one-third of OECD member states, including Canada and several European countries, the OECD states. So far, appreciating property prices in the US have not been accompanied by a rapid increase in household debt, reflecting moderate growth in household mortgage debt, in contrast to the period before the 2008 financial crisis.

"However, in a number of countries, including Australia, Canada, Sweden and the United Kingdom, debt in relation to household income has remained high."

The OECD, which has 35 member nations, including developed and selective emerging and Asian countries, is monitoring "vulnerabilities in asset markets". In particular it is concerned that a jump in bond yields, that is, long-term rates that affect mortgage rates, could have a negative impact on inflated property prices.

London prime property prices have already begun to fall, mainly because of a steep rise in stamp duties on the sale of growing numbers of new developments coming on to the market. The government has also been raising controls on purchases by foreign corporates based in tax havens, following concerns about the potential of money laundering. Indeed, currency analysts contend that a sharp decline in property purchases from these buyers have played a role in the weakness of sterling as their former inflows helped support the currency. On the other hand, the combination of the slide of sterling since Brexit and the decline in prices could encourage legitimate foreign investors, estate agents say.

According to Lonres, a property data company, the average price paid per square foot across prime central London, fell to £1,744 (S$3,086) per square foot in the third quarter of 2016, a 6 per cent decline compared to the same period in 2015. The market over £5 million, with the most substantial stamp duty burden, fell by an average of 12 per cent and at the end of September was 16 per cent below the peak seen in 2014. Illustrating weakness there has been a sharp contraction in the volume of sales in the final quarter of last year, estate agents report.

Paradoxically, however, the OECD contends that a decline in London prices could have a buffeting impact on the UK economy, as hard pressed young local buyers could find it easier to purchase and spend less of their incomes on high rentals. In other words, Chinese, Russian, Middle Eastern and other foreign investors - large-scale holders of pricey London residential property - would bear most of the burden of declining property values.

In its November report, the OECD stated that "even after the post-US election snapback in bond yields in mid-November, bond valuations remain particularly extreme in Europe and Japan". The proportion of sovereign bonds trading at negative yields was estimated to be above 50 per cent in several countries. Around US$12 trillion of government bonds, representing around 31 per cent of OECD government debt, was estimated to have negative yields, the OECD estimated. The result of punitively low bank savings rates and low government bond yields "have boosted the prices of riskier assets such as corporate bonds, equities and real estate". Moreover, since bond yields, that is long-term rates, affect mortgage rates, a rise in yields would be followed by an increase in mortgage costs, causing stress to overborrowed holders of property.