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Real Estate

21 April 2015

Are property price fears valid? 

Some analysts worry that the long period of ultra-low interest rates is driving global real estate prices higher, pushing rental yields to rock bottom and risking a sudden switch from boom to bust. Other assessments, however, present a more nuanced picture.

The alarmists include research group MSCI, which is warning that a global property bubble could be developing. The group argues that lower interest rates are leading to “increasingly aggressive” property pricing and that current levels may be unsustainable.

However, MSCI also reports that in some struggling economies, including areas of the eurozone, there is plenty of room for growth. Global centers led by London and New York have demonstrated the strongest growth, but there are signs that European markets are reviving as quantitative easing starts to show its effects.

The Economist House Price Index, which tracks 26 markets around the world, also suggests the bubble fears could be overblown, conceding that while pockets of over-valuation exist, it is not a global phenomenon.

The index shows property is more than 25% overvalued in seven markets, including Australia, the UK and Canada, and prices are rising in 19 markets, but they are falling in much of the eurozone periphery, as well as in China, where the construction boom is coming to an end.

The problem with trying to determine whether property markets are overvalued or not is that current pricing is simply a rational reaction to extremely low interest rates. Loose monetary policy continues to distort asset pricing, most obviously in the bond markets, but property is another logical target for yield-hungry investors. The situation is unlikely to change until monetary policy starts to tighten.