Global economies are becoming more interconnected, and so are real estate markets. Researchers at the International Monetary Fund (IMF) measured prices in 44 cities, and 40 countries – both in advanced and emerging markets. What they found is that whole countries are seeing real estate prices in the closest synchronization since the Great Recession. Even weirder, this is the first time that whole countries are moving in synch, at the same time as major cities. Not even around the Great Recession did we see that. Cool observation, right? It’s less cool once you realize we may have just entered a global real estate supercycle.
The Real Estate Cycle Explained
In order to understand why this is important, first you need to understand real estate functions in a cycle. Markets generally move in four stages — recovery, expansion, hypersupply, and recession.
Recovery: The first (or last stage) comes right after the recession. Builders are scouting new locations at rock bottom prices, but not much building gets done during this phase. People aren’t super excited about shows on HGTV here.
Expansion: This is when we see the economy boom, vacancies decline, and new construction start. Prices start to rapidly escalate and peak. You’ll start to notice a lot of cranes emerging from big smoking holes in the ground. People love HGTV again.
Hypersupply: Since real estate was such a good investment, middle class folks double down and create speculative demand. They turn their profits into gambles, and drive a lot of that pre-construction during the end of the expansion. Eventually those pre-construction units hit the market, and many middle class tears are shed. People make fun of HGTV shows here.
Recession: A combination of high household debt from buying at peak, as well as losses during the hypersupply, eventually lead to a recession. Debt isn’t all that complicated, it’s borrowing from your future income, and the country’s economic growth. This eventually leads to a lack of consumer spending, and decimating local employment. People loathe the happy people on HGTV here.
The whole cycle then repeats, and repeats. Everyone is shocked every time. There’s some more to it, but we’ve covered this before so head over if you want more details. The cycle was first observed over 100 years ago by an economist named Henry George. Now that you’re up to speed, try to spot the issue before we explain it.
Global Real Estate Prices In Major Cities Are Now In Synch
IMF researchers observed home prices are moving together in both advanced and emerging economies. To measure this, they created a median term synchronization scale. It sounds fancy because it is, it captures how closely prices are moving together. The scale measures home prices in 44 major cities, and 40 countries, breaking them down into advanced economies and emerging markets. The chart plots in negative values, and the closer they get to 0, the closer they are in synch. Today we’ll just be looking at advanced economies.
Synchronization of global real estate prices in advanced economies
Synchronization of price movements in advanced economies, at both the country and major city level. 0 is perfect synchronization.
Source: International Monetary Fund. Better Dwelling.
In advanced economies, whole countries are seeing prices move with those of major cities. From 2013 to 2016, price synchronization jumps nearly 40% on both major cities and whole countries. Whole countries have only seen closer movements around the Great Recession. Major cities are just coming off of the high achieved the second quarter of 2016. From the chart, whole countries and their major cities have never been so closely linked by prices.
No, Every Advanced Country and City Is Not The Next Manhattan
We know, your real estate agent told you density and housing scarcity is to blame for price increases. We bought into it for a second, until we realized that even agents in Papa New Guinea were saying they were the next Manhattan. IMF researchers offer a different explanation than a rise in fundamentals. The increasing financial integration of the world.
Researchers call out 3 areas – interest rates, institutional investors, and wealthy individuals. Once the Great Recession hit, interest rates were slashed aggressively, in order to stimulate borrowing. The cheap money spilled over into cheap mortgage rates across the globe, helping average people to more easily absorb price increases. Who needs income when you’ve got credit, right?
Institutions and wealthy investors were looking for the same thing – yield. Researchers noted these groups of investors began chasing yields, looking for better returns in the low interest rate environment. They specifically call out markets such as Amsterdam, Melbourne, Sydney, Toronto, and Vancouver. This isn’t something new to regular readers, but always nice to see academia get up to speed. In a few years, they’ll probably even learn there’s a whole platform dedicated to selling whole condo blocks, reserved just for ultra-wealthy Asian families.
That’s Bad News If You Understand Real Estate Cycles
My brief explanation of real estate cycles wasn’t just an unrelated rant. The increasing synchronization means we’re seeing advanced economies hitting the same phase, at the same time. Investor demand is leaving vacant homes around the world, and cities like Toronto, Vancouver, and London can no longer sell to locals at these levels, at the volumes needed. We’ve likely just finished an expansion phase, and are seeing the first signs of hypersupply. Keep an eye out for falling prices around the world.
The increasing synchronization of real estate prices is great during a boom, a.k.a. an expansion phase. Money flows across borders, and the vast majority of middle class homeowners see paper gains far exceeding their wages. The big problem is that strength is also a huge vulnerability, leaving all countries at risk from shock from a single country.
You no longer have to worry about your neighbours paying their bills to kick off a collapse of your housing market. You now have to worry if someone 3,500 miles away bought too much house in your neighbourhood. Economic shock to a real estate market in one part of the world, can now lead to a domino effect across the globe. Now we’re starting to see global hypersupply appear. Pop quiz, does anyone remember what comes after hypersupply?
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Wait, does this mean another global financial crisis?
It sure does. China’s unpegging of the yuan is going to rattle the world regardless.
But but but, Sam Mizrahi the condo developer just said yesterday that Toronto is under priced and still catching up to Manhattan. How can we be catching up if its all in sync?
https://torontolife.com/real-estate/five-things-we-learned-at-the-toronto-tomorrow-real-estate-summit/
As Stephen says on his Twitter nearly daily these days, Greater New York’s GDP is the size of Canada’s whole economy. The work being done by the people in that geographic area, is the equivalent of our economy, crammed into a region the size of Toronto.
Besides, New York isn’t even rising here, it’s dropping like a stone. People finally realized they can just move and work remote from any city. That’s only going to get worse.
https://www.cnbc.com/2018/01/02/manhattan-real-estate-prices-and-sales-fell-ahead-of-tax-changes.html
Im just messing around. Toronto is not the next Manhattan, more likely the next Athens.
Pain train is coming.
Grizzly,
Did I ever say that I love your commenting? Are you implying that condo developers are being disingenuous about pricing? Let me check with my local RE agent (who was a bartender before he took the 4 month course to be an RE agent) to see what is the real story.
It should also be noted that Mizrahi Development is currently building “The One” which once completed will be the tallest skyscraper in all of Canada!
Has anyone ever heard of the skyscraper curse?
http://www.businessinsider.com/explanation-of-the-skyscraper-curse-2016-8
Quick overview. The biggest and most over the top buildings quite often get approved and funded right before a big crash. Usually completed after the economy is already in the crapper.
Low interest rates are the solution, not the cause. They help households put more towards principal, not make mortgages less affordable.
Nice troll Sammy (e-high five). I’m not even going to lay into you on this one; we know your schtick. By honey bun. BD4L.
Lol Sammy always trolling.
Given our household debt levels it’s safe to say that didn’t happen. The voice for the common man shtick. Nice one.
I guess we will see. Will interest rates ever seriously rise again? I do know house prices have tripled here in Canada over the last 15 years, does this make any sense? Not really…I also know debt levels are at record highs in government, at all levels as well as record personal debt. A real greedy mess…
Can the scum bags in government who created this mess, get us out of it? NO they cannot….they never can, so now we wait, watch for the next crash, the next pop in housing, stock markets…we are in a bubble, in all areas…the next one will be nasty for all, except for the scum bags in government. Yes the big union, public sector parasites, the baby boomers who have created this mess over the last 5 decades with all their greed. They are the true scum of this nation…all started under daddy, Trudeau SR and his crooked Quebec scum bags…
Government can’t get out of it, and don’t want to risk devaluing their own assets.
We think a Trudeau run government is different from the Harper run one, but it’s exactly the same. The right prefers an old white guy, the left prefers a young white guy. It doesn’t matter that they have the same plans.
Each time I see “Harper this!” or “Trudeau that!” I sob, because as Canadians I don’t know how we got so tricked into blaming each other for the actions of an incompetent, corrupt few. We are more like each other than we are like these politicians, in spite of what they would have us believe.
Well said.
I’m not going to unpack this. Go home James you’re drunk on your own political chutzpah. BD4L.
I seriously thought this article was going to end by saying that the global economy would keep things going….I thought that was the bad news.
Just the thought of a global recession sucks. I want housing prices to drop, but not like this….
Very nice article. Good points. Like that synchronization graph.
Links for Toronto, Vancouver and London were provided. Here is the missing link for Sydney too:
http://www.abc.net.au/news/2018-06-01/housing-market-first-annual-drop-6-years-sydney-melbourne-hobart/9825136
This issue is very real and with our debt levels there is no chance we will stand it better than other countries.
This is the canary in the coal mine. NYC prices are falling- it’s unheard of, my friends.
https://www.nasdaq.com/article/a-global-real-estate-crisis-is-brewing-cm971130
Now rents are stalling across major US cities.
http://www.nreionline.com/multifamily/multifamily-rent-growth-stalls-top-markets
We are turning the corner into recession. If global RE markets are interdependent then I would expect to see Canada take a hit soon.
Putting on my tinfoil hat but if you think I’m wrong please burn my ass to the ground: this global downturn will be the biggest gutting of boomer/inter-generational-wealth/middle class ever. The 0.1% has viewed this as the biggest threat to their global progress since the 80s… Ever global hub has been approaching bubbles in almost all assets housing/land/assets/consumer good/input materials/commodities/etc. Between the impending market correction and housing damage there will be swaths of 55-85 year olds left in tatters. I believe the narrative coming out of this will further two cancers which seem to be propagating at a rampant pace; promotion of xenophobia/nationalism and destruction of liberalism/decency. Not talking all the ‘snowflakes’ (I love that term btw…) with their hamster trans rights and #metoo distractions, that shit needs to end…more so ethnic acceptance, migration, integration, cultural acceptance, generally not being an asshole to people who don’t look/act just like you. We’re seeing this already happening in most major mainland European countries(germany, spain,greece, italy), Eastern EU(Ukraine, Georgia, Lithuania, Czech), Common Wealth (CND, NZ, AU, etc). So middle class ruined, everyone around the world is aggressive and trying to blame others (read: the chinese/US/Europe/Russia)…then we have a senior figure in an offshoot country get murdered by an even more fringe participant and then everyone takes a side and piles in…oh yeah, that already happened…Ahhhhhh shiiitttt….BD4L.
So like “more so ethnic acceptance, migration, integration, cultural acceptance, generally not being an asshole to people who don’t look/act just like you” are real issues, but then “with their hamster trans rights and #metoo distractions” those are snowflake issues?
I’ll repeat.
“generally not being an asshole to people who don’t act just like you” “hamster trans rights”
Stick to RE Blue, you’re good at RE.
Should we all be selling our houses then? Would it be better to rent now? I guess if you have one house and can hold on to it for 30 years (i.e. till retirement), you should be fine since the market will eventually go back up…
Most of the times market will go back up, sometimes it wont, there is no 100% guarantee.
It’s thought decision and it’s always a gamble.
I would say if you have a lot of debts (including mortgage), little equity, bought a house recently and it’s not your dream house in a dream area – you may want to start analyzing this market very carefully.
You should make your own decision here.
Market in GTA in GV is at least 30-50% overvalued, that’s the fact. Take a piece of paper and write down all risks and headwinds for RE market in the nearest future. On the other site write down all tailwinds which may help prices to grow further.
This web site and other resources explain those risk/tailwinds very well.
As soon as you have a clear picture it will be easier for you to make decision just from Risk/Reward perspective.
also keep in mind that every 100k discount you were able to get on the house turns into 500k (not adjusted for inflation) 25 year later if invested gradually in stocks under your RRSP at 8%.
IT was a going run most people made money
Man, that hypersupply is a real bummer…
https://tradingeconomics.com/canada/housing-starts
I’m open to narratives about the overvaluation of the market, it would just seem prudent to address the major gap between the thesis of the article (good times -> oversupply -> crash) and the actual supply numbers.
I’ll leave all you hyper-rationalists to mock the cucks who’ve been bamboozled by the MSM into believing in the housing market.