Canada and New Zealand are the most vulnerable economies to a correction in house prices, with Australia and the U.K. also drawing concern, according to new research from Bloomberg Economics.
Seeking to build a “housing bubble dashboard,” economist Niraj Shah studied ratios of house prices to rent and income as well as inflation-adjusted prices and household credit.
The results showed that Canada and New Zealand seem to be on the most unsustainable path, with the cost of housing compared with wages the highest in the world in both countries. Australia, Norway, Sweden and the U.K. also raise alarm bells, Shah said.
Policy makers may be acting already. Canada’s government has introduced a tax on foreign buyers, while overseas purchases have been banned in New Zealand. The next challenge will be whether prices keep rising as the Federal Reserve and other central banks get ready to cut interest rates.
“There’s a risk that a global round of monetary easing may fuel housing bubbles,” said Shah. “While central bankers are focused on avoiding a global economic downturn, looser monetary policy could sow the seeds of the next crisis.”
House prices have only just returned to the peak they reached prior to the last period of financial turmoil, according to an index consisting of 57 economies.
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