- Bank sees 35-40% chance of prices dropping in next two years
- New Zealand houses most over-valued followed by Canada, Sweden
The Swedish and New Zealand housing markets are the most at risk of a correction among the so-called G-10 economies, according to Goldman Sachs.
In a report on house prices in G-10 nations — those with the 10 most-traded currencies in the world — Goldman finds they are most elevated in small, open economies such as Sweden and New Zealand. The investment bank said there is a 35-40 percent chance of a housing “bust” in each country over the next two years, which it defines as house prices falling five percent or more after adjustment for inflation.
Goldman compares house-price levels across economies using three standard metrics: the ratio of house prices to rent, the ratio of house prices to household income and house prices adjusted for inflation.
“Using an average of these measures, house prices in New Zealand appear the most over-valued, followed by Canada, Sweden, Australia and Norway,” it said. “According to the model, the probability of a housing bust over the next five to eight quarters is the highest in Sweden and New Zealand at 35 to 40 percent.”
A graph in the report shows that New Zealand’s probability of a housing bust is just above 40 percent, while Sweden’s is just above 35 percent. The risk of a bust in Canada is about 30 percent, while in Norway, Australia and Switzerland the probability is assessed at 20-25 percent.
New Zealand house prices have surged 60 percent since 2010, while Sweden’s have risen 41 percent, according to data compiled by the Bank for International Settlements. New Zealand’s central bank last week forecast house-price inflation would slow to 5 percent this year from 14 percent in 2016, but remain positive through mid-2020.
Goldman said the pace of credit growth over the prior five years is an important indicator of asset-price busts. Its housing bust model also includes the house price-to-rent ratio, past changes in real house prices, the investment-to-GDP ratio, real GDP growth, and inflation.
“The probability of a house-price bust has been picking up across the smaller G-10 markets in recent years — a result of rising prices and high credit growth,” it said.
Immigration, Low Rates
While residential investment in Sweden and New Zealand are high, immigration booms and population growth in both countries are supporting construction demand, Goldman said. “In contrast, Australia, Norway, and Canada appear overbuilt,” with home-building activity outstripping the demographic demand for housing, it said.
Household debt relative to disposable income stands at record levels in all the countries it looked at, but Goldman said debt servicing ratios have remained relatively low due to record-low interest rates.
The bank said its model is “just one tool” and has “a few key drawbacks,” including predicting housing busts too often.
However, taking the model output and other data into account, “we see reason for some concern about house-price developments in the small open G-10 economies,” it said. “Prices do appear overvalued and credit growth has been high — traditional warning signs of real house-price declines.”