Fears of housing bubble

PUBLISHED : Wednesday, 06 June, 2012, 12:00am
UPDATED : Wednesday, 06 June, 2012, 12:00am


Bright spots on the global property scene are about as abundant as good news in Greece right now. New data shows house prices have fallen in at least 24 countries this year, and have risen in only 12. In this, the first of a two-part series, we look at two of the best performers: Brazil and India.

Data from the Global Property Guide's latest house-price-indices survey takes into account sales made in the first quarter of this year. According to the guide's authors, the pace of decline has accelerated since then, with 26 countries now in decline, and price gains in only 10.

Bucking this tide of gloom, values in the booming markets of India and Brazil 'surged further' early this year. According to the data, Delhi house prices 'skyrocketed by 24.4 per cent' in the first quarter, but fell 0.1 per cent in the months since. In Sao Paulo, prices climbed by 18.7 per cent in the first quarter, growing by a more moderate 2.6 per cent in the latest quarter.

But such growth spikes are not always welcome and, in the case of Brazil in particular, give rise to fears about a housing bubble.

A research paper by London-based Capital Economics from April suggests the property market in Brazil is overvalued by as much as 50 per cent. It cites 'reliable figures' showing that prices in Sao Paulo and Rio de Janeiro, the two largest cities, have increased 140 per cent since 2008, adding 'it is difficult to escape the conclusion that Brazil's housing boom has gone too far'.

'There is growing concern in Brazil,' concedes Matthew Montagu-Pollock, publisher of the Global Property Guide. 'Property prices have been skyrocketing due to the economy's outstanding performance over the past decade, and the government's aggressive moves to increase the income of the lower and middle-income groups - and thus their spending power - and its very aggressive moves to encourage low-and-middle-income housing construction. So the construction sector is booming. And the mortgage market is expanding rapidly. Many believe that all this is unsustainable, and are worried by parallels with the global housing boom and crash.'

Montagu-Pollock notes that residential prices have actually lagged growth in gross domestic product per capita over the past decade in Brazil. 'True, not too much should be read into this, because globally, low-income countries tend to have higher house-price-to-GDP-per-capita ratios than high-income countries - and Brazil has been moving rather sharply up the global income scale,' he says. The real concern for him are imbalances in the economy because of an overvalued currency and high inflation.

Rental yields have also fallen, according to property guide research, from 8 per cent on a 1,300 sqft Sao Paulo apartment in 2009, to about 5.7 per cent today. 'Based on these factors, we would be somewhat worried,' Montagu-Pollock says. 'However, Brazil is a domestically-driven economy, so is relatively insulated from the wider global economy. Economic management seems sound. So we would expect the housing boom to halt, but no dramatic crisis to be unleashed.'

Capital Economics also expects a soft landing. 'Looking ahead, Brazil's ability to register relatively strong rates of nominal income growth should make it easier for the housing bubble to deflate slowly, via an adjustment in real prices,' says Neil Shearing, chief emerging markets economist at Capital Economics.

It's a similar story in India, where 'there are signs of a more serious gathering storm', according to Montagu-Pollock, pointing to economic data.

'In January to March, India's GDP growth slowed to 5.3 per cent - a significant slowdown. India's current account deficit is around 4 per cent of GDP at US$19.6 billion, versus US$10.1 billion a year earlier. The fiscal deficit is around 5.8 per cent of GDP, the trade deficit is 9.9 per cent of GDP, and inflation is 7.2 per cent. On the demand side of the economy, investment is contracting, and industrial production fell in the latest quarter. All these pointers are worse than in the case of Brazil.'

Yields have declined significantly in Delhi since 2007, when rental yields of more than 6 per cent were easy to find. Today, gross rental yields on 1,300 sqft New Delhi apartments are about 1.6 per cent. 'All things considered, this is a worrying situation and we would be cautious,' Montagu-Pollock says.

However, Anand Narayanan, national director at residential agency Knight Frank India, says the prime markets of South Delhi and South Mumbai continue to be resilient - especially in robust South Delhi, where city development rules have restricted high-rise supply. He says Gurgaon has been the better performing market within the Delhi region, with areas near the golf-course extension and Dwarka Expressway the prominent investment destinations.