The global housing market has gotten too hot to be sustained, according to Oxford Economics' deep dive into more than 121 years of housing data.
Home prices in advanced economies may be about 10% overvalued compared to the long-term, according to new research from Oxford Economics lead economist Adam Slater. This "boom," Slater notes, is one of the biggest since 1900.
The last boom period in 2006 saw home prices 13% to 15% overvalued, based on Oxford's analysis. Students of market history remember what came next — a global financial crisis, fueled by rampant speculation in the global housing market.
Such strong price appreciation currently — driven by low interest rates and shifts in the wealth of populations —has Slater concerned about a reversal in prices not too far off into the distance.
"Some evidence suggests the longer a housing boom continues, the bigger the risk of a large reversal. Looking at individual economies, risk indicators show a varied picture: the riskiest markets look to be the Netherlands, Canada, Sweden, Germany, and France," Slater points out.
If there is a saving grace, it's that any pullback in housing prices will unlikely be as painful as the global financial crisis due to improved household balance sheets.
"Arguably, sharp rises in house prices are more worrying if accompanied by rapid increases in housing debt/leverage. The rapid rise in prices since the 1970s coincided with a very large increase in the share of mortgage credit in GDP (from 20% to over 60% on a median basis across our sample), and some of the biggest housing booms – such as those in the 1920s, 1980s, and 2000s – were preceded or accompanied by rapid credit growth," explains Slater. "The current housing boom looks less worrying on this score. Growth in mortgage credit in recent years has been relatively subdued, although it has started to pick up lately. The share of mortgage credit in GDP remains below its 2008 peak and the recent rise is mostly due to the collapse in GDP in 2020 due to the coronavirus pandemic,"
As it stands, home price appreciation isn't showing much in the way of a surprising reversal. In fact, quite the opposite.
In the U.S., the median existing-home price for all housing types in June hit $363,300 — the highest level recorded since January 1999 — Yahoo Finance's Amanda Fung reports. The results follow the S&P CoreLogic Case-Shiller national home price index posting the fastest price growth in more than 30 years.
“At a broad level, home prices are in no danger of a decline due to tight inventory conditions, but I do expect prices to appreciate at a slower pace by the end of the year,” National Association of Realtors chief economist Lawrence Yun says. “Ideally, the costs for a home would rise roughly in line with income growth, which is likely to happen in 2022 as more listings and new construction become available.”
Yahoo Finance's Amanda Fung contributed to this story.