Housing Market-Bubble 2022

Housing plays a vital role for any country in keeping the economy growing. It contributes to the financial market with Mortgages resulting growth of financial system while it contributes directly in consumption of commodity materials and service sector through manpower supply for construction of Building. Real Estate is considered as one of the largest employment generator for many countries.

However, post COVID the rampant increase in rates of Properties in various Developed and developing economies has created a lot of wealth for investors. We already emphasised enough on Chinese real estate market and its collapse. In this blog we will concentrate on upcoming threats from Australia, Canada and USA with some data facts and figures.

Post Covid, various countries never had problem of shortage of housing supply specially Canada or Australia where we are having major emphasis. The real problem was shortage of affordable housing and its location. The real bubble began when investors started treating Housing as a commodity and credit market really fuelled it where speculators floated Fear of Missing out.

AUSTRALIA

Lets first share the rise in prices of property in Australia in since 31.03.2020 through this table.

Source: Bank of International Settlement

Coming on to Gross value added in Australia, it offers allied variety of natural resources in mining which can outperform global peers with commodity boom. Enriched mineral resources used in consumption of steel, forest produce quality, health care segment, education and Tourism. But the real bubble started with 20% of GVA added through real estate holding large portion of credit.

Yes you guessed it right. It is interesting to note that roughly 19.20% of Australian economy is been derived through Real Estate and Construction Activity (7.3% Construction+3% Rental, Hiring and Real Estate and 8.9% ownership of Dwelling). The figure is toughly $353 Billion.

Credit Size of Australian Mortgage Market

The size of Outstanding Mortgage Loan in Australian economy is $1.60 trillion which is more than size of GDP of Australia ($1.32 Trillion). But lets present more accurate figure obtained from National agencies in Australia.

Source: Common Wealth Bank Australia

So post sharp fall in prices of real estate in New Zealand (Neighbour), the interest cycles has started upward movement in Australia. The Reserve Bank of Australia is also in a hurry to increase interest rate and already the mortgaged rates are increasing sharply in Australia. Its just matter of time when we will see sharp decline in price of Real Estate in Australia.

CANADA

One of the most favoured First world nation which has one of the best quality of life. Yes its difficult to be neighbour of Super Power of world (US). But it doesn’t matter when as a country you have so much to offer.  Enriched with lots of natural resources along with vast amount of Agriculture product, low demography factor and one of the best quality life. Canada has a GDP of $350 Billion. However, in past few years the real estate market has lot of buzz in the country. As repeatedly said, fueled by debt market the prices of real estate has increased substantially in a low populated country. Not only in main city, but the prices have increased in outskirts of Canada. Lets look into the numbers:

Source: Statistics Canada (industry GDP and employment data); industry GDP contributions based on seasonally adjusted chained 2012 Canadian dollars.
Source: Bank of International Settlement

Credit Size

Canadian Mortgage debt size has increased multi fold in last 2 decades, but the speed post corona is too sharp. The size of debt increased from $1.66 Trillion to $1.94 Trillion as on Dec 2021. Chart below will tell much better picture:

It is interesting to see that the 5 year mortgage rates in Canada have increased from 1.99% in Jan 2022 to 2.59% in April 2022. Looking into debt size of 1.94 Trillion, a half percent rise is equivalent to 10 Billion dollars additional outflow a year. So it is very much possible that the floating rate will be costly affairs and will result in higher level of delinquencies.

UNITED STATES

When we already talked about few first world countries, it is very important to discuss in detail about housing market of Super Power country. Like other countries the Housing market in USA also witnessed rampant increase in prices of Housing sector post corona. Already the housing market resulted in 2008 crisis triggered by explosion of Collateral Debt Obligation. However, at that time the size was in few 100s Billion. Right now, with constant QE since 2008, debt fuelled multifold while the interest rate constantly decreased in last on decade. The moment Fed tried to decrease Balancesheet size, market reacted adversely. Be it 2015 or 2018, it was all one time trigger of gun from Bullet. However, all those time, inflation was hidden but the presence of inflation was invisible.

Lest concentrate on few housing market numbers and chart in order to have our detailed analysis:

Source: Bank of International Settlement

Mortgage Rate Chart

Household Debt and Credit Developments as of Q4 2021

Source: New York Fed Consumer Credit Panel/Equifax

The Total Mortgage debt rate is $10.93 Trillion at present.

It is clearly evident that major economic growth was fuelled through housing credit market which rotated various other financial market products and created value addition through trading with such products. Further additional derivative products of loan products have further increased financial market size to next level.According to the Bank of America, US Collateral Loan Obligation market in the country has an outstanding balance of $850 Billion (Forget about the insurance on such products).

Flow into Serious Delinquency (90 days or more delinquent)

Source: New York Fed Consumer Credit Panel/Equifax

Conclusion

Analysing the  market of Canada, US and Australia we can conclude in nutshell that any increase in mortgage rates will only result in defaults in near future. Majority of the population in these countries have opted for Floating rate of interest. At present in all these three countries, housing is not considered as affordable, rather its becoming more like a short term investment tool where in less than one year few millions are printed in a very easy manner irrespective of location.

Now coming to the effect on banks, generally many banks require upfront money to the extent of 5% of value of property and remaining 95% is being offered as mortgage repayable period of more than a decade (further extended to 30 years). Unlike security provisions where ideally the finance should be done at 60% value of assets, these banks do not give consideration to such factors. Imagine a situation where the prices of property starts falling suddenly to the extent of 10-15% in a month. These Banks will be forced to ask for collateral from such customers. Or imagine where the mortgage rates spiked substantially like in US further, delinquencies will start increasing. This will result in forfeiture of properties by bank and Banks will be forced to sell these properties and start recovering its dues. Any mass default will further lead to distress selling resulting in damage to collateral. One more hidden factor which resulted in continuation of bubble is Chinese overseas investment. Companies like Fantasia, Country Garden, etc. started new projects in overseas. Further with liberal Chinese laws related to foreign investment in properties, it is believed that more than 5% Chinese started buying properties in first world countries like Australia, Canada and US. Now this rotation of money has stopped with slow down in real estate in China. Furthermore, with rising inflation, the consumer spending will increase towards purchasing daily needs which will result in increase in Household debt and will force them to curtail investment in real estate or other avenues.

The factor stated above and data presented above are indicating that the Real Estate bubble has peaked now. Only rapid fall in prices are awaited which will lead to recession globally.

– By Nishant Maheshwari & Vishal Vora

Disclosure: The above article is based on views expressed by the authors and are meant for information purpose only. Readers are requested to take investment decisions by consulting their financial advisors.

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