- In many industrial economies, deleveraging since the GFC has made debt service more manageable.
- Strong jobs and wage growth have underpinned affordability and confidence.
- Tight housing supply, immigration, and equity market rally have helped property demand as well.
- Some economies have property sector stress, especially China, Hong Kong, and South Korea.
- But for most markets, favourable dynamics appear here to stay for a while.
Commentary: High rates and property prices
Property prices in most major markets are defying high interest rates. US home prices are up about 6.5%yoy, reaching an all-time high last month. From Australia to Portugal, India to Singapore, the much-feared property market adjustment under the weight of some of the highest rates seen in decades has not materialised. In places like India and Malaysia, the markets appear to be downright buoyant. Even the Philippines, where home price growth has reached 0%yoy lately, there has been no instance of price decline in this cycle. Multiple factors are contributing to the markets’ sustained resilience. First, post-GFC deleveraging has pushed down household debt/GDP ratio substantially in a number of industrial economies, ranging from the US to UK to Spain. In these economies, even as interest rates have risen, debt service ratios have been manageable. Second, the rate hike cycle is only in its third year, with many households with existing mortgages yet to feel the pinch of the higher rates thanks to their fixed rate term loans. Third, with a tight labour market and booming equities, income growth has been strong, giving some the confidence to take on higher rates. Finally, in some countries, especially the US, a pick-up in immigration has helped boost demand for housing. Housing inventory is also tight, compounding the supply side of the narrative.
The situation is not comfortable everywhere; here in Asia, China, Hong Kong, and South Korea’s real estate markets remain under pressure, with home prices declining through the first quarter. China continues to grapple with a historic boom-bust cycle, with numerous supportive measures implemented so far yet to turn the market around. Hong Kong and South Korea are suffering from high interest rates and high debt burdens. For these two economies, Fed policy rate cuts are keenly awaited, but the wait seems to get longer and longer.
We don’t think the still-buoyant property markets around the world can remain oblivious to high rates if monetary policy tightness sustains through next year. For the coming quarter or two though, favourable dynamics appear to continue, much to the frustration of some central banks.
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