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Global Real Estate Trends (Oct 2009)

Global Real Estate Trends (Oct 2009)

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We have rebadged our regular Real Estate Trends report to reflect the expanded coverage of residentialreal estate markets to eight major developed economies in addition to Canada and the United States(see page 10). Where available, we consider average prices of existing homes, using commonly citednational series. National home prices have been deflated by each nation’s all-item consumer priceindex to arrive at a comparable real home price series.Global real estate markets are showing tentative but growing signs of stabilization. Real home prices increased in a number of major developedeconomies in the second quarter of 2009, including Canada, Australia andthe United States. Prices were still falling in many other markets, includingthe U.K., France and Spain, but generally at a slowing rate. For the mostpart, however, real home prices are still lower relative to a year ago (chart 1).We believe the improving sentiment in global residential real estate marketsis sustainable. The firming in pricing is evidence of growing confidence inthe sustainability of the fledgling global economic recovery. Historicallylow borrowing costs, increased affordability, and home-buyer tax incentivesin a number of countries are underpinning a modest revival in housingdemand. Indeed, signs of a bottoming in home prices are likely nowbringing some fence-sitters off the sidelines.Financial market conditions, including rebounding global equity markets and an easing in creditconstraints, also are becoming more supportive. A significant amount of worldwide excess productioncapacity will keep a lid on inflationary pressures for some time to come, allowing monetary authoritiesto keep short-term interest rates at historically low levels and very supportive of housing marketactivity.Nevertheless, the rebound in housing activity will be constrained in part by a generally more cautiousborrow and spend mentality, with weakened household finances leading to a renewed focus onreducing debt and rebuilding savings. Labour market conditions are beginning to stabilize, butunemployment rates remain high and are expected to be slow to decline. A more cautious lendingenvironment is expected to persist as financial institutions around the world recapitalize their balancesheets.There remain excesses is the global housing market itself that point to an extended period of moresubdued activity. Many countries are burdened with an excess supply of unsold housing inventoryafter years of overbuilding. Despite recent price declines, housing valuation measures such as price-to-rent and price-to-income ratios also suggest some continued overvaluation in many markets.
October 1, 2009
Scotia Economics
Scotia Plaza 40 King Street West, 63rd FloorToronto, Ontario Canada M5H 1H1Tel: (416) 866-6253 Fax: (416) 866-2829Email: scotia_economics@scotiacapital.com
This Report is prepared by Scotia Economics as a resource for theclients of Scotiabank and Scotia Capital. While the information is fromsources believed reliable, neither the information nor the forecast shallbe taken as a representation for which The Bank of Nova Scotia orScotia Capital Inc. or any of their employees incur any responsibility.
Global Real Estate Trends 
is available on:
www.scotiabank.com, Bloomberg at SCOE
Reuters at SM1C
A Global Housing Recovery Is Underway
Global Economic Research
Adrienne Warren
(416) 866-4315adrienne_warren@scotiacapital.com
Global Real Estate
Global Real Estate
Global Economic Research
October 1, 2009
Yet, even a stabilization in housing prices, demand and constructionwould be highly supportive of a broader economic recovery,particularly as the near-term fuel provided by government stimulusspending and inventory rebuilding begins to fade. Homeownershipis a crucial sector of national economies and an important source of wealth for many households, influencing spending, saving andborrowing decisions. It also has significant spillovers to otherdomestic industries, including retail sales, finance & insurance, anda range of professional services (e.g. legal, engineering) andhousehold services (e.g. landscaping, movers, cleaners).
A Synchronized Housing Cycle 
The housing boom, and subsequent bust, of the past decade is globalin scope, even as the degree of price change has varied considerablyfrom country to country. In most major advanced economies, realhome prices appreciated rapidly beginning around the mid-1990sand continuing into the latter part of this decade. The strength of thehousing market coincided with a generally robust global economy,low interest rates and in many cases, mortgage market innovationand deregulation.The notable exceptions are Japan and Germany. The bursting of Japan’s stock market and real estate asset bubble in the early 1990shas been followed by steadily declining real home prices since 1992.In Germany, real home prices have been declining since the mid-1990s, after generous post-reunification tax incentives led tosignificant overbuilding. A shrinking population base also continuesto weigh on property values in both countries.The global house price boom all but ended last year, as weak economic growth, rising unemployment, the exhaustion of pent-updemand and overbuilding in many nations bumped up against asevere tightening in global credit conditions. Realhome prices declined in 9 of the 10 countriestracked in 2008. In Australia, inflation-adjustedprices were flat on average, but had moved intonegative year-over-year territory by the second half of the year.Countries that experienced the biggest boom havegenerally faced the biggest bust. Ireland recorded byfar the largest trough-to-peak real appreciation,totalling almost 300% from 1993-2006, based onannual average prices. It has also suffered one of thelargest price corrections to date, at more than 25%.Real home prices in the United Kingdom climbed170% from 1996-2007, but have subsequently fallenclose to 20%.The somewhat smaller, though still sizeable pricegains in Spain (128% from 1997-2007), France(111% from 1998-2007) and Australia (103% from1997-2008) have been followed by relatively modestprice declines of 11%, 10%, and 6%, respectively, todate. Real price appreciation in Canada (66% from1999-2007) and Italy (61% from 1998-2007) falls atthe low end of the pack, as does the subsequentretracement (8% and 1%, respectively, based on thelatest data available).The U.S. market stands out from the rule. Thecumulative trough-to-peak rise in inflation-adjustedU.S. home prices was just 50% from 1996-2005, thelowest among the eight countries with price gains.Yet, U.S. residential real estate has suffered the
Data Footnote
Despite their importance in influencing economic outcomes, housing prices are often not among the ‘official’ data gathered by nationalstatistical organizations. Rather, they are usually collected by real estate organizations or private research institutes. Indeed, amongeconomic and financial variables, home prices are possibly one of the more problematic, given vastly different concepts, measurementapproaches and data availability across countries. In many countries, there are several competing measures available. In others, suchas Japan, no dwelling price statistics are available and land prices are usually used as a proxy. The frequency of the published datavaries from monthly to annual. Where available, we have used average prices of existing homes sold. The detailed sources to the hous-ing price statistics on page 10 are as follows:Australia: Price index of established houses, weighted average of 8 capital cities. Quarterly. Australian Bureau of Statistics.Canada: National average price of MLS residential sales. Monthly. Canadian Real Estate Association.France: House price index of existing homes. Quarterly. National Institute of Statistics and Economic Studies (INSEE).Germany: Resale house price index. Annual. OECD.Ireland: National average price of second-hand houses. Quarterly. Irish Department of the Environment, Heritage and Local Government.Italy: Resale house price index, average of 13 urban areas. Semi-annual. OECD.Japan: Nationwide urban residential land price index. Semi-annual. Japan Real Estate Institute.Spain: Average price of second-hand houses. Quarterly. Bank of Spain.United Kingdom: ODPM mix-adjusted house price index, pre-owned dwellings. Monthly. U.K. National Statistics.United States: National average price of existing home sales. Monthly. National Association of Realtors.
Global Real Estate
Global Economic Research
October 1, 2009
largest downward price adjustment to date (29%). Riskier mortgagelending, and the resulting surge in foreclosures and distressed sales,appears to be the main factor behind the unusually largeretrenchment.Looking ahead, we anticipate a gradual synchronized improvementin housing activity in most economies, supported by highlystimulative policy initiatives — fiscal stimulus and historically lowborrowing costs — that are likely to remain in place over thecoming year.
Canadian Focus — Building Momentum
While not as robust as the revival in resale housing activity, newhome construction in Canada has notably turned up. On a trendbasis, housing starts are running just over 140,000 annualized units,up from a spring low of around 120,000 units. Most regions areshowing gains, with the largest improvement in Canada’s fourwestern-most provinces.The trend in residential permits, whichtend to lead starts by about two months, isaveraging a little over 150,000 units,pointing to some further modest pickup inthe months ahead. Builders areresponding to tight resale marketconditions, which tend to spur relativedemand for new homes. Rising sales andlimited resale listings have led to thereturn of a “sellers’ market”, in turnpushing up prices. Indeed, new homeprices increased in July for the first timesince last September.Despite the modest rise in new construction, the inventory of unsoldnew homes, which has been trending higher since 2003, appears tohave peaked, having edged down for a third consecutive month inAugust. The current overhang is a bit higher than its long-termtrend, though still well below the peaks reached during the housingbust of the early 1990s (chart 2). Moreover, the pace of new stock additions remains firmly below estimated long-termreplacement needs of around 175,000 units annually.Assuming sales remain reasonably firm and buildersdo not significantly ramp up the pace of newconstruction, current inventories bear watching, butare not overly concerning.Aggregate inventoryfigures mask someimportant developments.The oversupply of newhousing is centred in thecondo market; the unsoldinventory of single- andsemi-detached homes hasdropped more than 25%since March, with salesvolumes consistentlyexceeding the number of new units coming on themarket (chart 3). Thesharp rise in condo inventories in turn reflects anunusually high level of recent completions, thelagged response to earlier strength in sales andstarts. Condo completions are outpacing condo startsfor the first time in more than a decade, and by awide margin.Home sales remain brisk, underpinned by ultra-lowinterest rates, improving consumer confidence,rebounding stocks markets, and first-time buyer taxincentives. At the same time, there is some sign thatpent-up demand is being satisfied. Existing homesales edged down marginally in August, after sixmonths of steady growth. We expect resale marketswill become better balanced in 2010 as pent-updemand from the depressed levels of last fall andwinter wanes and as the number of listings increase,removing some of the recent incentive to add morenew housing stock, and cooling price increases inboth the new and resale market.

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