New York property jitters herald declines elsewhere

Some treat housing like a tradeable asset and chase yields. But what happens next?

Gillian Tett

Hong Kong policymakers have tried to cool the housing boom by making it harder to extend mortgages © Getty

Clouds are hovering over New York’s housing market. A couple of years ago, property prices were spiralling ever higher — much like the new luxury skyscrapers now springing up in midtown Manhattan.

But estate agents say that sales volumes in the first quarter of 2018 were at their lowest level for six years. Meanwhile the median price per square foot was 18 per cent lower than a year earlier, according to some reports.

That leaves Manhattan estate agents nervously gossiping about the local outlook. However, it should prompt investors and policymakers to ask a bigger question: could New York’s jitters herald declines in other non-US real estate markets too? Do those global markets, in other words, display “ synchronicity ”, or spillover effects?

Until recently, many economists assumed the answer was “no”. Investors have long known that global equity and bond markets often move in tandem, because globalisation has knitted together investment flows and the investor base.

However, economists used to think that real estate prices were less correlated, since a house, unlike a stock, has a utilitarian function (it is a place to live), and real estate prices are often shaped by local factors. Estate agents in Manhattan, for example, are blaming the recent slowdown on the negative consequences of Donald Trump’s tax reforms — and a glut of new luxury properties.

But last month the IMF published its first comprehensive analysis of global property and this suggests that real estate is becoming prone to synchronisation too. Two decades ago, only 10 per cent of property price movements could be blamed on global — not local — factors. Now it is 30 per cent.

This is still lower than for equities, where global correlations run at 70 per cent. However, what is striking is that this real estate synchronisation is affecting urban centres in both emerging and advanced economies. Or as the report notes: “House prices in major cities outside the United States — Beijing, Dublin, Hong Kong SAR, London, Seoul, Shanghai, Singapore, Tokyo, Toronto and Vancouver — are positively associated with US house price dispersions.”

This might seem unsurprising. After all, the global elite hop across borders at dizzying speed. So does financial capital, and sentiment-shaping news. Meanwhile, the market capitalisation of the real estate investment trust sector has tripled in the past 15 years, and large asset managers allocate on average of 11 per cent of their portfolios to property.

This has made the housing market more “financialised”, since some investors are treating housing more like a tradeable asset, chasing yields around the world. No wonder that a decade of ultra-loose monetary policy in the west has lifted so many geographically dispersed real estate boats.

But the question now provoking debate at the IMF — as well as in western central banks — is what happens next. One unwelcome consequence of synchronisation is that domestic policymakers have become less powerful. Previously, central bankers tried to prick housing bubbles by moving domestic interest rates. But this does not work as well in a world of flighty capital flows.

Some policymakers are exploring other tools. Ireland, for example, has tried to cool a housing boom by introducing rules that make it harder to extend mortgages. Canada and Hong Kong have used similar measures. But these homegrown measures have not been particularly effective at pricking domestic price bubbles when global liquidity was abundant. They are even less likely to work in reverse if the global tsunami of liquidity suddenly dries up.

Right now, there is no sign of this liquidity squeeze actually happening. Although the US Federal Reserve has raised rates six times in the past three years, this has notably not tightened financial conditions yet because policy at other central banks remains so loose. But the key point is this: if (or when) global financial conditions eventually become less benign, there will probably be downward movement in housing markets too, with some unexpected spillover effects.

Indeed, the most intriguing point in the IMF report is that “heightened synchronicity of house prices can signal a downside tail risk to real economic activity, especially when taking place in a buoyant credit environment”.

In plain English, this means that a correlated boom in global real estate markets can signal trouble ahead. We should keep a close eye on those estate agents’ reports in New York — as well as London or Hong Kong. The Big Apple’s jitters might yet be a canary in the coal-mine.

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