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The collapse of the US housing market at the end of 2007 dragged the global economy into a deep recession, but the real estate markets in Australia and Canada did not plummet like the US market and became “role models” for global economies to learn from.
The myth did not play out in the global housing downturn, with house prices in both countries falling for months in a row.
1. Why didn’t they repeat the victories of the financial crisis?
two。. Will they usher in a real estate crash?
two。. Canada.
During the financial crisis, Canada’s mortgage default rate did not rise sharply compared with its neighbor, the United States, and no Canadian bank needed a government bailout. The Economist called Canada “a country that did the right thing” (a country that got things right).
This can be attributed to a number of factors, but perhaps the most important is regulatory differences. Compared with the loosening of lending standards in the United States, Canada has prevented lenders from providing mortgages to people who cannot pay.
Canada’s subprime market is much smaller than the United States, with a subprime loan ratio of only about 5% in 2006, compared with 22% in the United States.
Higher lending standards have dampened demand for homes in Canada, where prices rose relatively little before the 2008 recession.
As can be seen from the chart below, although the monetary policies of the United States and Canada are very similar, house prices in the United States have risen much faster than in Canada, which rose almost twice as much between 2000 and 2006.
When the subprime crisis broke out, the delinquency rate in the United States soared, but by mid-2009, Canada’s delinquency rate showed little sign of increasing.
After a brief fall in house prices, house prices soon began to rise again as the Bank of Canada cut interest rates to cope with the recession.
However, after the Bank of Canada began to raise interest rates in March this year, the housing market could not hold up, causing both volume and price to fall.
According to the Canadian Real Estate Association (CREA), the average house price of Canadian real estate sales in October was $644, down 10% from a year earlier and more than 20% from a peak in February 2022, and home sales fell 36% in October from a year earlier.
three。. Australia.
Australia was also one of the countries that avoided a property crash in 2008. The chart below shows ABS’s established Australian housing price index, which recovered quickly after a slight decline in 2009.
Like Canada, Australian home loans are cautious. In mid-2007, Australia’s substandard home loan market (the subprime mortgage market closest to the United States) accounted for only about 1% of the mortgage market, significantly lower than about 13% in the United States.
Even during the financial crisis, Australia’s big four banks remained profitable and maintained their highest credit ratings.
In addition, Australia is the only developed country that avoided a technical recession during the financial crisis, with a good basic support for the housing market.
This is also thanks to China, then Australia’s second-largest export market, with GDP growth of more than 6 per cent and strong import demand that helped Australia weather the downturn.
But now Binzhou house prices have fallen for six months in a row, with Australian home values down 1.2% in October, Sydney, the highest, down 10.2% since its peak in January, and Melbourne, down 6.4% since February.
four。. Why can’t you stand it?
The main reason for the decline in the housing market is the rise in interest rates.
In the US, people usually lock in long-term fixed interest rates (usually 30 years) to protect against rising interest rates, but 60 per cent of mortgages in Australia are at floating rates, while the most common mortgage maturity in Canada is five years. Mortgage payments in both countries tend to increase as interest rates rise and are more sensitive to monetary tightening.
As the Bank of Canada continues to raise interest rates rapidly, the average interest rate on five-year mortgages has doubled to nearly 5%.
At the same time, because these markets have been booming for a long time, house prices have largely accumulated “bubbles” and become unaffordable, and Australian households are among the most indebted in the world.
It is estimated that the country’s household debt has exceeded 200 per cent of average disposable income, and even so few people can afford to buy a house, and the home ownership rate of Australians aged 30-34 has fallen sharply from 64 per cent in 1971 to just 50 per cent in 2021.
The same is true of Canada, where household debt accounts for 185 per cent of disposable income, and house prices in most parts of Canada have risen by more than 50 per cent in less than two years.
In these markets, falling house prices may not be a bad thing. Carolyn Rogers, senior deputy governor of the Bank of Canada, said in a speech on November 22nd that we need to lower house prices to rebalance the Canadian housing market and make home ownership more affordable for more Canadians.
five。. Supporting factors?
First of all, there are still a large number of immigrants pouring into these two countries, and more immigrants mean more housing demand.
Canada’s population experienced significant double-digit growth from 2006 to 2021, with the number of immigrants receiving an all-time high in 2021. The country is also preparing to significantly increase the number of immigrants, according to the immigration plan announced on November 1st. The goal is to bring in 500000 new immigrants by 2025.
In fact, in Toronto, a populated area of Canada, house prices began to rise again in October.
Australia is also a country of immigrants. Australian Interior Minister Claire O’Neill recently announced that the maximum number of immigrants in the 2022-2023 fiscal year will be increased from about 160000 to about 195000.
A shortage of housing stocks will also support house prices, with inventory levels in Canada’s main real estate markets falling over the past decade.