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According to a research report released by Bloomberg on July 14, two developed economies, represented by Canada and New Zealand, have firmly ranked first in the world in terms of house price bubbles.
Bloomberg economist Niraj Shah, who conducted the study, used four indicators to observe the level of real estate bubbles in 23 major developed countries: price-to-rent ratio, price-to-income ratio, real house prices and household loans as a share of GDP.
The results show that New Zealand ranks first in terms of price-to-rent ratio and price-to-income ratio, while Canada ranks first in terms of real house prices and household loans as a proportion of GDP. Combining the four indicators, the housing bubbles in the two countries are neck and neck.
The study also believes that there are similar bubbles in the real estate markets in countries such as Australia, the UK, Norway and Sweden.
If house prices rise too much, they are laying the groundwork for a future collapse. After studying 30 years of real estate trends in 32 countries, IMF points out that more than 2/3 of the nearly 50 systemic banking crises over the decades saw house prices soar or plummet. The Oxford Institute of Economics calculates that if the real estate market collapses, GDP will fall by 1.5 per cent and increase by 2.1 per cent.
Sales of luxury homes in Toronto and Vancouver, a bellwether of the property market, halved in 2018, with sales of single-family homes with a total price of more than C $1 million plummeting 46 per cent year-on-year in Toronto and 47 per cent in Vancouver.
Property prices in several major Canadian cities are experiencing explosive growth, according to a report by Better Dwelling, a Canadian real estate website. From 2000 to March 2019, house prices rose 239.9% in Toronto and 315% in Vancouver. Take Toronto as an example, compared with several major cities in the United States, its house price increase is 33.67% higher than Los Angeles, 45.27% higher than San Francisco, 61.01% higher than Seattle, and 133.39% higher than New York.
In 2006, when the Canadian housing market was at its peak, residential investment accounted for 8% of GDP, twice that of the United States. But investment in residential construction in Canada fell 14.7 per cent in the fourth quarter of last year, the biggest drop since 2009. Investment in housing fell by 3.9%, investment in new housing decreased by 5.5%, and investment in decoration decreased by 2.7%. As a result, Canada’s GDP grew by just 1.8 per cent in 2018, down 40 per cent from 2017.
This economic decline also continues into 2019. Canada’s GDP grew by just 0.4% in the first quarter, the lowest since 2015.
Similar to Canada is New Zealand. New Zealand’s GDP grew by just 0.6 per cent in the first quarter of this year.
In 2017, the real estate market contributed more directly to New Zealand’s economy than the country’s manufacturing and agricultural sectors.
New Zealand house prices are soaring while the property market is falling. The number of properties sold to foreigners fell 81% in the first quarter of this year compared with the same period last year, according to New Zealand’s National Bureau of Statistics. In terms of economic growth, New Zealand also performed poorly, growing by just 0.6 per cent in the first quarter of this year.
IMF pointed out that New Zealand’s economy has lost momentum and is at downside risk-New Zealand’s business confidence index has fallen to a 10-year low so far this year, with per capita GDP falling to the seventh lowest in developed countries.
On May 8 this year, the Central Bank of New Zealand announced a cut in interest rates. Cut the official cash rate (OCR) to an all-time low of 1.5 per cent. New Zealand’s move also fired the first shot at interest rate cuts in the world’s developed economies.
On the day of the rate cut, the New Zealand dollar fell, hitting a six-month low. “combining domestic and foreign factors, interest rate cuts can better achieve New Zealand’s policy goals of employment and inflation.” Adrian Orr, governor of the Bank of New Zealand, pointed out.
But opponents satirize it as “a signal from an interest rate cut, like asking the entire fire brigade to climb a tree to save a kitten”. Looking back on the November 2016 rate cut, it did not boost consumption. instead, it gives the real estate market another chance to boom.
It has always been the direction of the two governments to crack down on house prices and squeeze out the bubble through the regulation and control of the property market.
As early as 2017, New Zealand Prime Minister Jacinda Adan put forward the proposal of “banning foreigners from buying property” during the election campaign, and the so-called “most severe purchase restriction in history” was formally approved on August 15 last year.
The purchase restrictions are mainly aimed at restricting second-hand housing transactions by foreign investors. According to the regulations, foreigners can only invest in newly developed apartment buildings. It is worth noting that if you want to buy an apartment, you must have more than 20 apartments at a time, and you are not allowed to live in it, you can only rent it. Due to restrictions on second-hand housing transactions, foreign investors can only sell to locals if they want to sell at a later stage, and the New Zealand government hopes to improve the domestic housing market and stabilize prices.
Coincidentally, Canada has also taken relevant regulation and control measures for the craze of foreign property speculation.
In Vancouver, for example, the local government has raised the tax on purchases by foreigners from 15 per cent to 20 per cent and plans to impose higher taxes on those who buy second homes, where the main breadwinner of the family comes from overseas and whose house prices exceed C $3 million.
At present, however, it seems that the government’s regulation of the property market has had little effect on stimulating the economy.
Goldman Sachs forecasts that Canada’s full-year GDP will grow 1.75 per cent year-on-year in 2019, down even from its previous forecast of 1.9 per cent.
The Reuters survey also said that the Canadian economy, which is highly dependent on the housing market and foreign investors, is facing a capital withdrawal disaster-a common problem faced by many economies after the Federal Reserve operated QE and tightened over the past few years.
Compared with market fears about the Canadian real estate bubble, the Bank of Canada is relatively optimistic and said it will continue to maintain a sound monetary policy. Goldman Sachs also pointed out that the Bank of Canada is likely to maintain the status quo, given expectations of weakness in the Canadian housing market in the coming years.