Auckland, New Zealand, has overtaken Toronto as become the world’s top destination for luxury housing, a survey says.Hannah Peters/Getty Images
Skyrocketing home prices. Media reports of rampant house-flipping, with speculators reaping six-figure gains reselling ramshackle properties. A political furor over what many believe is a wave of offshore money flooding into the city's housing market, pushing out local buyers.
The setting could easily be Vancouver. But in this case it is Auckland, New Zealand, where plunging interest rates, rising population growth and a growing appetite among global investors for local real estate has caused house prices to double in the past five years.
This year, Auckland overtook Toronto to become the world's top destination for luxury housing, according to a survey by Christie's International Real Estate.
As Canada grapples with how to cool house prices that have soared this year in Vancouver and Toronto, global figures show the country is hardly alone in dealing with an unprecedented real estate boom fuelled largely by low interest rates, loosened monetary policies and investors who are scouring the world in search of growth.
Real estate brokerage Knight Frank said prices are on the rise in three-quarters of the 150 cities in its global house-price index.
House prices in many of the world's leading financial centres are now "fundamentally unjustified," the firm said in a report earlier this year.
The tidal wave of global money flowing into real estate can be difficult to fathom.
Swiss investment bank UBS estimates that quantitative easing by central banks has tripled the global supply of money since 2008. By April, there were more than $8-trillion (U.S.) worth of government bonds offering negative interest rates, according to Bloomberg, forcing investors to look for opportunities in other assets.
It's not surprising that many have found their way into real estate. In an analysis earlier this year, brokerage Savills estimated that real estate makes up 60 per cent of the world's investable assets, eclipsing equities, bonds and precious metals. "Every global region seems to be reporting asset price inflation, particularly in the core prime markets," the brokerage's analysts wrote. "This clearly shows that there are global forces at work that act as a heavy hand on the tiller of local markets."
Like Canada, other countries are now scrambling to slow their housing markets. Many have implemented new regulations that require borrowers to have minimum down payments or rules that limit the amount of debt home buyers can take on relative to their incomes. Others, such as Britain and Norway have targeted mortgage lenders, raising the amount of capital they must hold against mortgages, or restricting the amount that banks can lend to property investors and to borrowers with small down payments. Hong Kong and Singapore have gone the route of B.C. and taxed foreign buyers. Australia now restricts foreigners to purchasing only newly built homes, in hopes the global appetite for real estate can help increase the country's housing supply.
Yet it is not clear how effective such measures have been in cooling housing markets in the long term, as home prices have continued to surge in many countries that have enacted changes.
In recent years, New Zealand regulators have introduced a slate of measures to slow Auckland's overheated housing market. The country has launched a registry to track foreign buyers and introduced a capital-gains tax on properties that are resold within two years to curb speculation. Its central bank requires lenders to ensure that no more than 10 per cent of their mortgages are provided to borrowers with less than 20-per-cent equity in their homes. Property investors will now be required to have down payments of at least 40 per cent, compared with the average of 20 per cent in Canada.
Yet home prices jumped an annualized 12 per cent in July, to nearly $1-million (NZD), the national real estate institute reported. Analysts estimate that nearly half of current buyers are investors. The country's opposition leaders have taken to calling for an outright ban on foreign buyers ahead of next year's national elections.
Both Sydney and Melbourne have seen home prices jump by double digits in the past year, despite the Australian government's crackdown on foreign investors that has forced some owners to sell their properties or face steep fines. In Hong Kong, where the government taxes foreign investors and speculators who sell homes shortly after purchasing them, home prices have fallen roughly 10 per cent from peak levels last fall, but remain among the most unaffordable in the world, at roughly 20 times the average household income.
In June, Sweden's financial regulator enacted changes that require mortgages with low down payments to amortize, after flagging high levels of interest-only loans that take nearly 150 years to fully pay off. Home price growth in Stockholm has slowed since then, but prices remain 10 per cent higher than the same period last year.
Britain is one example of just how hard it can be for policy makers to control housing booms in the face of sudden changes in economic circumstances.
Early last year, Bank of England Governor Mark Carney called the prospect of lowering interest rates "foolish." At the time, regulators were in the midst of enacting new rules to cool London's red-hot housing market, including stricter capital requirements for banks and a 3-per-cent tax on second homes and rental properties.
Little more than a year later – after the country voted to leave the European Union – Mr. Carney slashed interest rates and introduced a round of quantitative easing to head off a Brexit-induced recession. Home prices, which had cooled slightly in the wake of tighter rules, have since roared back. Average prices in London jumped an annualized 13 per cent in June, although some analysts still expect them to fall in the second half of the year.
Many of the changes to housing-market policies since 2008 are simply too recent for their effects to have been thoroughly studied by economists and academics.
However, a 2013 study for the Bank of International Settlements might hold some clues. The study by researchers Kenneth Kuttner and Ilhyock Shim looked at more than 1,100 housing-market policy changes in 57 countries over more than 30 years.
It found that rules to raise minimum down payments or restrict the debt levels of banks had little effect on the housing market. Measures such as limiting borrowers debt loads helped slow the growth of household debt, but not home prices. The only tool that seemed to significantly affect the housing market was the one that governments have used the least, according to the researchers' review of policy changes.
Raising housing-related taxes, such as property taxes, fees on capital gains or sales taxes appeared to be "the only policy with a measurable impact on house prices," the authors wrote.
Canada is about to become the newest test case for that theory. Housing-market analysts are waiting to see whether the B.C. government's new 15-per-cent tax on foreign home buyers in the Metro Vancouver area, which took effect this month, has any success in cooling the country's hottest local market.
If so, it will add one more weapon to the arsenal of global policy makers as they search for a silver bullet to their housing-market woes.