Australia and Canada in top 3 riskiest housing markets

According to a new report from Oxford Economics, Sweden, Australia, and Canada experience “especially acute” housing market danger, in that order.

Housing market volatility has historically “posed a threat to economic activity” in affected countries.

“In all four [top countries], valuations are very elevated, there has been a lengthy housing boom, debt levels are high, and there is a significant share of floating rate debt,” said Adam Slater, lead economist at Oxford. The fourth “riskiest” housing market is Hong Kong.

The Oxford study notes that key housing markets like the United States, Germany, and France have a “relatively limited risk” of experiencing economic leveling due to their housing markets.

And, across most worldwide housing markets, “there has been no significant recent rise in mortgage rates, which have even fallen in some cases.” The mortgage rates are usually the classic “trigger” for housing decline.

In Australia, home prices have fallen around 3% this year in its major cities. In Sydney, for example, prices have fallen 5.6%. “Meanwhile, three of the nation’s four major banks raised mortgage rates in recent weeks, blaming higher funding costs.”

Oxford Economics compared housing markets across OECD (Organisation for Economic Co-operation and Development) countries from 1970 to 2013 only to find a clear and negative relationship between rising home valuations and falling house prices.

“Where valuations had risen 35 per cent or more above the long-term average over that period, real house prices fell 75 per cent of the time over the following five years.”

“This points to many OECD countries seeing stagnant or negative real house price growth in the next few years: the scope for a further house price ‘melt-up’ in highly valued markets looks extremely limited,” said Slater.

When home valuations are stretched to their limits, large economic risk floats to the surface. Oxford cited 83 different house price booms in its study, showing that significant housing and economic risk is strengthened by increased housing prices, leading to an “often substantial” price fall.

“For the G7 countries, we find a positive relationship between consumer spending and real house prices from 1997, albeit possibly weakening in recent years.”

After Hong Kong, New Zealand, Denmark and Norway round out the top 7 riskiest housing markets in the world according to Oxford.