House Prices

Thursday, August 23rd, 2018

The global financial crisis was known for the crash of housing prices in the USA trigged by an unsustainable mortgage market. But since then, central banks have kept interest rates artificially low through quantitative easing. This has lead to investors and savers reaching for other avenues to get higher returns.

The flow of funds has gone to high yield debt, to equities, to real estate and to other alternative investments. Post 2009, we have seen real estate bounce back smartly and in many cities prices are at record highs. The Economist has a new global cities house price index that captures this trend:

Even Mumbai has not escaped this trend, with prices rising 308 per cent since 2009. Some of this change has been driven by demographics, with people increasingly migrating to these big global cities for jobs. There is probably also some aspect of foreign capital going toward investing in “safe-haven” cities.

But the global environment is starting to change:

  1. Quantitative easing globally has started to recede  and interest rates have started to rise. Higher interest rates mean mortgages get more expensive.
  2. There is growing protectionism and a clamp down on capital flows either exiting from or going into countries. This restricts foreign investment in apartments.
  3. A number of these cities are in countries where the population is ageing and so demographics are starting to work against the trend of growing demand
  4. In many cities, prices have risen to levels that are unaffordable relative to the income of the local population and thus current levels are unsustainable
  5. The boom in property prices is also fuelling the rise of new supply, with many cities like Vancouver, London and Sydney bringing new inventory to the market

Its difficult to tell if the global trend of rising prices will change, but it is definitely going to be much harder for the boom to sustain given the underlying challenges that are starting to present themselves.

About the author

Rishad is the founder of Kairos Capital. He started his career with Standard Chartered Wealth Management and has extensive experience in markets, particularly in terms of mutual funds and stocks.

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