Ladder or snake?

A decade after the Global

Financial Crisis, where next for
residential property prices?
 Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

Contents
Part 1 – How did we get here? 02
A tale of financialisation  04
Factors behind this tale of financialisation 14

Part 2 – Where to from here? 18

A tale of lost affordability  20
Are rising residential property prices tenable?  24
A confluence of factors
Endnotes 28
Contacts 29

01
Heading

Part 1 – How did we get here?

More than 10 years after the Global Financial Crisis, residential property prices are
hitting new highs. Is this a "new normal"? Or, as with the pre-Global Financial Crisis
property price rises, is this a bubble waiting to burst?

02
 Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

These high prices have been driven

to a large extent by ultra‑low interest
rates. Yet, other factors are also at play.
To understand the extent of this rise and
its causes, we benchmarked a total of
nine primary (Paris, London, New York
City (NYC), and Hong Kong) and secondary
cities (Berlin, Barcelona, Lisbon, Zurich, and
Geneva) over the period 2007‑2018, across
a number of metrics:

• Acquisition/m2 (USD)

• Yield

• Interest rates and acquisition/m2 (USD).

03
A tale of financialisation
The aftermath of the Global Financial Crisis and the need to repair consumer and
bank balance sheets has led to an unprecedented period of low rates. We are now
a decade on from 2009, yet rates in most developed nations, bar the US, hover near
historic lows. The current bout has ended, as the Chair of the US Federal Reserve (the
Fed), Jeremy Powell, acknowledged that trade policy uncertainty has slowed global
growth, and that monetary policy1 can help offset that.

04
 Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

Interest rates, 2007-20182

7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00

13

15

07

15

17

17

8
07

07

09

09

11

11

13
-1

-1
-1

-1
-1
-0

n-

p-

n-

p-

n-

p-
n-

p-
n-
n-

p-

n-

p-

ay

ay
ay

ay
ay
ay

Ja

Se

Ja
Ja

Ja

Se
Se

Se
Ja
Ja

Se

Ja

Se

M
M

M
M
M

ECB BoE Fed

Bond investors have benefited from falling interest rates, which have
resulted in higher prices. Yields have fallen dramatically, with many
sovereign bonds offering negative yields. In the investment‑grade
corporate bond market, yields have fallen sharply too. Some corporate
issuers, like Nestle, have recently even seen their ten year bonds trade
at negative yields.

05
Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

Sovereign bonds yields, 2002-20183

6.00

5.00

4.00

3.00

2.00

1.00

0.00

5/1/2011

12/1/2011
3/1/2010

7/1/2012

2/1/2013
1/1/2002

8/1/2002

3/1/2003

5/1/2004

7/1/2005

2/1/2006

9/1/2006

4/1/2007

6/1/2008

1/1/2009

8/1/2009

9/1/2013

4/1/2014

6/1/2015

1/1/2016

8/1/2016

3/1/2017

5/1/2018
10/1/2010
10/1/2003

12/1/2004

11/1/2007

11/1/2014

10/1/2017

12/1/2018
Eurozone, 10 year bond UK, 10 year bond US, 10 year bond

Equity markets have also seen significant

gains since the Global Financial Crisis, with
Valuations, as measured by price‑earnings
the US market flirting with all‑time highs.
Valuations, as measured by price‑earnings
ratios have risen; moreover, the gap between
ratios have risen; moreover, the gap earnings yields (the inverse of the P/E ratio) and
between earnings yields (the inverse of the
P/E ratio) and bond yields remains high, bond yields remains high, supporting equities.
supporting equities.

06
 Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

S&P 500 earnings and dividend yield, 2002-2018 4

8%

7%

6%

5%

4%

3%

2%

1%

0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

S&P 500 earnings yield S&P 500 dividend yield

Property valuations have also responded to

this wave of ‘cheap money’. Property values
have risen and yields fallen, mirroring falling
earnings yields in stock markets. This is
despite, in many cases, stalling economies
and concerns over real estate valuations.
In the UK, 20% of households (around
4.5m)5 live in privately rented housing,
predominantly owned by so‑called
‘buy‑to‑let’ landlords.
Almost a half of rented homes are
owned by the 17% of landlords (around
As investors generally
255,000)6 owning five or more properties.
Investment by institutional investors in
acquire property
‘build‑to‑rent’ is growing, as well as in with the help of debt
niche areas like student housing and
retirement properties7]. The value of finance, lower interest
residential property is directly linked to its
income‑generating potential. As investors
rates have boosted
generally acquire property with the help
of debt finance, lower interest rates
the net income stream
have boosted the net income stream for for investors.
investors.

07
 Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

‘Lower‑for‑longer’8 interest rates have also

dramatically improved accessibility for
‘Lower‑for‑longer’ interest rates have also
homebuyers (for those than can access these
rates), giving a further kicker to house prices.
dramatically improved accessibility for
The charts below highlight falling mortgage homebuyers (for those than can access these
rates in the UK over the past five years as well
as 10‑year fixed‑rate mortgages as low as rates), giving a further kicker to house prices.
1.58% in the Eurozone. For the UK specifically,
ring‑fencing9 is another source of downward
pressure on mortgages rates.

As funds which could formerly have been

used to back riskier or foreign investments
are trapped in the ring‑fenced UK retail
operations, banks are left with little choice
but to put this money to work by lending
it to UK customers. This pushes down
mortgage rates.

Average interest rates for mortgages in the United-Kingdom by type of mortgage, March 2014-June 201910

4.5%

4%

3.5%
Average interest rate

3%

2.5%

2%

1.5%

1%
4

14

14

15

15

16

17

17

18

18

19
-1

-1
-1

-1

-1
-1

-1

-1

-1

-1

-1

-1
n-

p-
n-

p-

n-
n-

p-

p-

n-

p-
ec
ec
ec

ec

ec
ar
ar

ar
ar

ar

ar
ay

Ju
Ju

Ju
Ju

Se

Ju
Se
Se

Se

Se
M
M

M
M

M
D
D
D

D
M

2 year fixed rate mortgages* 3 year fixed mortgages** 3 year fixed mortgages*** 10 year fixed**** 2 year variable*****

08
 Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

Average interest rate of 10-year fixed mortgages in selected European countries in June 201811

Euro area 1.88%

Romania* 4.85%

Poland 4.33%

Netherlands 2.86%

Denmark* 2.76%

United Kingdom 2.74%

Spain 2.26%

Belgium 2.01%

Italy 1.98%

Portugal 1.98%

Germany 1.97%

Finland 1.85%

France 1.58%

*Data as of Q1 2018.

As funds that could formerly have been used to back riskier or foreign
investments are trapped in the ring‑fenced UK retail operations, banks
are left with little choice but to put this money to work by lending it to UK
customers. This pushes down mortgage rates.

09
Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

The steady rise in house prices since the
Global Financial Crisis is entirely logical
if residential property (especially in big
international ‘gateway’ cities like Paris,
London, NYC, and Hong Kong) is seen
by large institutions and high net worth
individuals (HNWIs) as an investment asset
class, and as they chase yield.
Low yields have long been a feature of
prime neighbourhoods (such as London’s
Kensington & Chelsea, Zurich prime
residential property, and Hong Kong Island)
but even here, the trend has been for yield
to compress further.

Primary cities acquisition/m2 (USD), 2007-201812

35,000.00

30,000.00

25,000.00

20,000.00

15,000.00

10,000.00

5,000.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Paris London London (Kensington & Chelsea) NYC Hong Kong

Primary cities residential property yield, 2007-201813

6%

5%

4%

3%

2%

1%

0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Paris London London (Kensington & Chelsea) NYC Hong Kong

10
 Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

Acquisition/m2 (USD), 2007-201814

8,000.00 20,000.00

7,000.00 18,000.00
16,000.00
6,000.00
14,000.00
5,000.00 12,000.00
4,000.00 10,000.00
8,000.00
3,000.00
6,000.00
2,000.00 4,000.00
1,000.00 2,000.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Berlin Barcelona Lisbon Zurich (right axis) Geneva (right axis)

What is perhaps new is that yield‑chasing

investors and select homebuyers armed
In cities such as Berlin, the combination of
with ultra‑low rate mortgages are driving
the same effects in secondary cities
homebuyers armed with lower‑rate mortgages
such as Berlin, Barcelona, and Lisbon. as well as yield‑hungry investors has helped
In particular, Berlin stands out when
rebasing acquisition prices/m2 to 2007. identify relatively undervalued markets with
In Spain15 and Portugal16, the lift in values
high affordability. This helped to close the
has corresponded almost exactly with the
European Central Bank’s (ECB) stimulus
valuation gap with other cities.
programme and bailouts of banks and the
sovereign respectively, as these countries
emerged from a prolonged slump following
the Global Financial Crisis. In cities such
as Berlin, the combination of homebuyers
armed with lower‑rate mortgages as well as
yield‑hungry investors has helped identify
relatively undervalued markets with high
affordability. This helped to close the
valuation gap with other cities.

11
Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

In cities like Lisbon and Barcelona where residential property valuations

were already rich relative to local incomes, the impact has been to make
home‑buying even more unaffordable, with the emergence of home
sharing platforms also reducing the availability of long term rentals.

Secondary cities residential property yield, 2007-201817

7%

6%

5%

4%

3%

2%

1%

0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Berlin Barcelona Lisbon Zurich Geneva

12
 Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

The impact of investors and foreign

capital migrating to lower-tax jurisdictions
While values fell during the Eurozone crisis,
is perhaps exemplified explicitly in the
chart below, which looks at the high-end
they began to pick up with the ECB’s significant
market in the Algarve in Portugal. While QE programme as well as with Portugal’s
values fell during the Eurozone crisis, they
began to pick up with the ECB’s significant initiatives to attract wealthy individuals
QE programme as well as with Portugal’s
initiatives to attract wealthy individuals
through its Golden Visa and its Non Habitual
through its Golden Visa and its Non
Habitual Resident schemes. This market
Resident schemes.
has recouped all its losses and more.

Algarve: price recovery. Upper quartile price index vs ECB base rate18

1.6 110

1.4 105

1.2 100

1.0 95

0.8 90

0.6 85

0.4 80

0.2 75

0.0 70
01/01/11

01/05/11

01/09/11

3/1/2003

01/05/12

01/09/12

01/01/13

01/05/13

01/09/13

01/01/14

01/05/14

01/09/14

01/01/15

01/05/15

01/09/15

01/01/16

01/05/16

01/09/16

01/01/17

01/05/17

01/09/17

01/01/18

01/05/18
Base rate Algarve price index (right axis)

13
Factors behind this tale of financialisation
Exceptional credit conditions – ultra‑low interest rates and longer‑duration mortgages
– have been the primary driver of increased residential property prices. As a case in
point, prices in NYC peaked around the time the Fed began to raise interest rates (see
third graph p16).

14
 Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

Amid slower global economic growth, it is

unlikely that the main central banks – the
For the residential property market, this
ECB, the Bank of England, the Fed – will
increase interest rates significantly in
suggests that buyers and sellers will
the next two years. For the residential continue to benefit from borrowing rates at
property market, this suggests that buyers
and sellers will continue to benefit from historically‑low levels until mid‑2022, if not
borrowing rates at historically‑low levels
until mid‑2022, if not longer.
longer.

ECB interest rates and acquisition/m2 (USD), 2007-201819

14,000.00 4.50

4.00
12,000.00
3.50
10,000.00
3.00

8,000.00 2.50

6,000.00 2.00

1.50
4,000.00
1.00
2,000.00
0.50

– 0.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Paris Berlin Barcelona Lisbon ECB (right axis)

Source: http://www.cbrates.com/, m2paris.fr, Guthmann Estate, kyero.com, Barometro Casa Sapo, Global Property Guide

15
Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

BoE interest rates and acquisition/m2 (USD), 2007-201820

14,000.00 6.00

12,000.00 5.00

10,000.00
4.00
8,000.00
3.00
6,000.00
2.00
4,000.00

2,000.00 1.00

0.00 0.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

London BoE (right axis)

Fed interest rates and acquisition/m2 (USD), 2007-201821

25,000.00 6.00

5.00
20,000.00

4.00
15,000.00
3.00
10,000.00
2.00

5,000.00
1.00

0.00 0.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

NYC Hong Kong Fed (right axis)

16

In addition to interest rates, supply and
fiscal and political factors have also played
a role in determining residential property
prices. In London, for example, increases in
stamp duty (transaction tax), rising supply
and fears over Brexit have led to the market
decoupling from other ‘gateway’ cities like
Paris and Hong Kong. The softening of the
London property market, especially at the
top end, has occurred despite a substantial
depreciation in sterling after the Brexit
referendum, which has made UK assets
cheaper for foreign buyers.
Finally, an additional factor driving up
residential property prices is the rise
of home sharing platforms. In Paris,
for example, we estimate (based on
a 100 Euro nightly rate and assuming
a 70% occupancy rate) that the rent from
a residential property let on home sharing
platforms can be almost two‑thirds higher
that from long‑term let. That is, the gross
‘home sharing platform yield’ can be as
high as 4.82% compared to 2.89% for
a long‑term let.
Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?
To conclude, will residential property
prices continue to be higher for longer?
The softening of the
We believe that a confluence of factors will
rein in them in. These factors are:
London property
market, especially
• societal changes – low affordability, further
exacerbated by the rise of the alternative at the top end, has
workforce, will likely drive further
governmental interventions and increased
occurred despite
regulation. For example, in the UK,
a Labour Party‑commissioned document
a substantial
has as its explicit aim a reduction in the depreciation in
rate of house price growth
sterling after the
• climate change – with consequences for
how residential property is valued (by
Brexit referendum,
taking into account risks such as flooding,
heat waves, degradation of the air quality,
which has made UK
etc.) assets cheaper for
• ageing populations in Europe and China, foreign buyers.
which is likely to decrease the demand for
housing
• economic contraction risk – with
consequences for banks’ lending capacity.
17
Heading

Part 2 – Where to from here?

In the immediate aftermath of the Global Financial Crisis, residential property prices
declined. This decline was fleeting, as central bank stimulus (ultra‑low interest rates,
large scale asset purchases etc.) later reinvigorated the residential property market.

18
 Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

Is this rise tenable over the long‑term?

To assess this, we benchmarked a total
of nine primary (Paris, London, New York
City (NYC), and Hong Kong) and secondary
cities (Berlin, Barcelona, Lisbon, Zurich, and
Geneva) over the period 2007‑2018, across
a number of affordability indicators:

• House prices as a multiple of income

• Rent as a percentage of income

• Home ownership.

19
Heading

A tale of lost affordability

The confluence of the ability to earn higher yields (through accommodation‑booking
sites like home sharing platforms, etc.) and cheap money have led to residential
housing increasingly being seen as an investible asset rather than simply a place to
live. This has contributed to a house price boom across both primary and secondary
cities. This has not been a universally happy experience. Rising prices have cut more
would‑be owners out of the market, while home sharing platforms et al have been
accused of reducing the availability of long term rentals for local residents.
20
 Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

Housing availability is also being reduced

by purchases by investors and second-
the metric of house prices to income and
rent as a percentage of income, as the
Anger over rising living
home owners, often leading to homes lying
empty for much of the year, if not years on
charts below show. Anger over rising living
costs has played a key role in protests
costs has played a key
end. Hong Kong stands out as an extreme there in recent years. role in protests there
example of an already unaffordable market
becoming even more stretched on both in recent years.

Primary cities acquistion price as multiple of income, 2007-201822

50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
–
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Paris London NYC Hong Kong

Primary cities rent as percentage of income, 2007-201823

140%

120%

100%

80%

60%

40%

20%

0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Paris London NYC Hong Kong

21
Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

However, voices of discontent are also

being heard in smaller cities, such as
With interest rates now widely expected
to stay lower‑for‑longer, this problem is
However, voices of
Lisbon and Barcelona. These have led to
rising restrictions on the number of days
unlikely to go away, as low financing costs
continue to support higher capital values.
discontent are also
that properties there can be offered on being heard in smaller
platform, capping of rents, and calls for
restrictions on purchases by foreigners. cities, such as Lisbon
and Barcelona.

Secondary cities acquisition price as multiple of income, 2007-201824

20.00

15.00

10.00

5.00

0.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Berlin Barcelona Lisbon Zurich Geneva

Secondary cities rent as percentage of income, 2007-201825

90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Berlin Barcelona Lisbon Zurich Geneva

22
 Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

Home ownership percentage, 2007-201826

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Spain Portugal United Kingdom United States France Germany Hong Kong Switzerland

Given this affordability issue, it is unsurprising that home ownership

in each country for our sample, bar France (where home ownership
increased by 7 percentage points), has decreased between 2007 and
2018. The UK and Hong Kong have seen the sharpest falls on this metric.

23
Heading

Are rising residential property prices tenable?

A confluence of factors
Several factors influencing both demand and supply raise questions about the
sustainability of residential property prices.

24
 Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

The rise of the alternative workforce (such
as freelancers), whose earnings are likely to
be more volatile than those of traditional
employees, is ill matched to 20 or 30 years
mortgages. Events such as Brexit,
arguably driven partly by discontent over
stagnating real incomes, could also have
multi‑year impacts on residential property.
London has been the world’s international
financial capital.
Its dominance could be lessened by
Brexit, the full impact of which may take
time to play out. History presents some
stark lessons from cities that lost their
‘raison d’être’. Mansions in Dublin’s swanky
Merrion Square which sold for up to £8,000
in the 1790s, plummeted to £2,500 after
the 1801 Act of Union between Ireland
and Great Britain. By the time of the Great
Famine in the 1840s, these mansions, could
be picked up for less than £500.
Note too, that regulators and governments
are all too aware of the high political cost
of unaffordable residential property prices.
As a result, several cities and countries
have already introduced macro‑prudential
measures to control residential property
prices.
In Singapore the government has been
raising stamp duty on purchases by
foreigners and second‑home buyers since
2011, including an increase in 2018 from 3%
to 4% for residential properties worth over
$1 million. However, as the chart below
shows, these measures have had only
a limited impact, compensated in large part
by investors’ quest for yield in a low‑rate
environment.

Nominal residential property price index for Singapore (2010=100) 27

120

110

100

90

80

70
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

25
Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?
We expect to see similar measures in
other cities. Moving beyond our sample of
cities, British Columbia, which already has
a foreign buyers’ tax, lifted this from 15%
to 20% in 2018. Scotland has introduced
stringent measures to protect tenants,
such as the effective end of fixed‑term
rentals, giving tenants indefinite security of
tenure, and doubling the annual municipal
tax on vacant properties. Such measures
reduce the attractiveness of property as
a financial asset.
Even the Conservative‑led UK Coalition
government increased property taxes for
foreigners. It introduced a 3% levy on the
entire value of second homes bought by
individuals. This clearly affects many of the
wealthy individuals who acquire a UK home.
And those holding residential property via
a company (a tool favoured by many foreign
owners) valued at £500,000 and above
are now subject to an annual property tax.
The ruling Conservatives have proposed
to introduce a further 3% stamp duty for
foreign resident purchasers in the event.
With inequality increasingly in focus, policy
shifts may well favour home affordability
over house prices. In the UK, tax policy
has historically been very supportive of
house prices. For example, the UK does not
levy capital gains tax on principal primary
residences. Moreover, landlords enjoy
generous fiscal incentives. This is already
changing, with lower mortgage interest
relief for landlords and higher buying taxes
for second home buyers and foreigners.
26
Another political shift in the UK has occurred
as a result of the expenses scandal.
Members of Parliament used to be allowed
to use their Additional Costs Allowance to
pay mortgage interest on a second home.
Critics claimed that this led to a bias towards
buy‑to‑let landlords. Now they can only
claim for rent on a second home or for hotel
costs28, and then only if their constituency
is outside London. Previously, MPs often
ended up with at least one, but often more,
additional residences, which they rented out.
Climate change, too, will have consequences
for residential property valuations.
Residential property will need comply with
potential regulations (e.g., to reduce CO2
emissions). To the extent that homeowners
may be required to foot the bill, this
could impair their ability to service their
mortgages or impair the value of residential
property (i.e. the bank’s collateral). In our
view, this calls for a prospective valuation
method reflecting risks29 such as: flooding,
heat waves, degradation of the air quality,
etc. Banks may well need to reflect climate
change risk in their mortgage portfolio
even before such a valuation method is
introduced.
The above‑mentioned factors, will likely
result in regulators mandating higher
deposit requirements for homebuyers as
well as stringent capital adequacy norms
for providers of mortgage products, in turn
hurting the propensity of banks to lend.
Basel IV capital standards, which are due to be
fully implemented by the beginning of 2027,
mandate higher risk weights for mortgages,
from what we believe are very low levels.
In the context of house prices that are
increasingly divorced from income levels,
we suspect this demand from regulators
will not show any let‑up. In Scandinavia,
for example, regulators have already
raised mortgage risk weights used to
assess capital adequacy significantly.
The impact has been to reduce or eliminate
perceived ‘excess’ capital buffers at banks
like Swedbank. This is likely to hurt more
European banks in the coming years.
Demographics, and in particular, a higher
old‑age‑dependency ratio, may also hurt
residential property prices. As a case in
point, a number of studies have explored
the link between demographics and
residential property prices across different
countries, pointing towards how an aging
population will exert a considerable
downward pressure on urban house
prices30.
Climate change,
too, will have
consequences
for residential
property valuations.
Residential property
will need comply with
potential regulations
(e.g., to reduce CO2
emissions).

Rising home prices are likely to lead to a rise
in supply and this in turn should help keep
house prices in check. This has already been
evidenced in London and NYC, and has
played a role in recent price corrections.
In general, we are seeing increasing amounts
of supply of ‘luxury’ properties across these
cities, to reflect strength in demand from
second home buyers and overseas investors.
House prices have been rising for several
years in most of the cities in our sample,
driving the perception that ‘house prices
always go up’, and leading to stretched
multiples of house prices to income, as
well as rent to income.
Unlike stock prices, house prices often
display patterns of positive serial
correlation31, i.e. they go up and up and
up, and then down and down and down.
That suggests that prices overshoot and
that, if and when prices do turn, these
metrics will provide no support to valuation
or confidence to buyers.
Given strong returns over the past decade,
future returns are, at the least, likely to be
modest. In the context of low inflation, a low
real rate of return from property will be
more apparent, further reducing its
attraction to investors.
Any rise in mortgage rates or regulations
mandating affordability checks for borrowers
could also hit house prices. In the UK
specifically, new ring fencing rules may have
incentivised big banks to increase mortgage
lending to address excess capital in their
retail divisions.
Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?
This has led to further declines in mortgage
rates and pressure on margins, with the
unintended consequence of squeezing out
competition. Any regulatory attempts to
address this lower competition could lead
to rising rates.
Interest rates are central to house price
prospects, and current levels make even
a 2% or 3% yield on prime property
attractive to investors. For investors and
homebuyers using variable‑rate debt,
nonetheless, even small rises in interest rates
will cause sharp rises in debt repayment
costs, another dampener on house prices.
In the UK, any strength related to currency
could be a dampener for overseas investors,
who have benefited from the depreciation
of sterling in recent years. Conversely, if
sterling appreciates, this would increase the
effective price for foreign investors, reversing
the trend of recent years. On the other
hand, a thin or "No deal" Brexit could cause
economic disruption, reducing the outlook
for UK economic growth.
Finally, the risk of an economic downturn
and its consequences for residential
property prices cannot be ignored.
With ever‑increasing prices, systemic risks
of a crash (whether sparked by a downturn
or a sudden hike in interest in rates) will
rise. These include potential dents to capital
adequacy at banks and the consequent
exaggeration of any downturn, as banks may
become risk averse right at the point when
the wider economy will need more liquidity32.
Real estate brings additional risks in contrast
to other asset price shocks. Unlike stocks
and bonds, real estate is inherently illiquid.
To the extent that there is an element of
‘hot money’ driving valuations, a rush to
the exits could exacerbate a fall in prices,
endangering an orderly correction of house
prices. With ultra‑low rates already in place,
the capacity of central banks to come to the
rescue is questionable.
In sum, rising unaffordability – for both rents
and purchases – is unlikely to be tenable
in the long‑term. Even if we set aside the
debate between the apostles of lower for
longer (on the basis of long‑term deflation)
and the apostles of lower for shorter (on the
basis of a return of inflation), a downward
adjustment of residential property prices
is more than likely. This adjustment could
either be quick (over a 5 years horizon) or
slow (over a 15 years horizon). Whichever it
is, the consequences for banks is likely to be
real, large and painful.
Any rise in mortgage
rates or regulations
mandating affordability
checks for borrowers
could also hit house
prices.
27
Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

Endnotes
1 https://time.com/5659876/us-economy-favorable-at-risk/
2 http://www.cbrates.com/
3 https://fred.stlouisfed.org/tags/series?t=bonds%3Bgovernment%3Bimf
4 http://investor.spglobal.com/Dividend-History
5 https://www.ons.gov.uk/economy/inflationandpriceindices/articles/ukprivaterentedsector/2018
6 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/775002/EPLS_main_report.pdf
7 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/775002/EPLS_main_report.pdf
8 The BoE shows that the rise in house prices, in the UK, relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in
the real risk‑free interest rate observed over the period. https://www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-
in-the-risk-free-real-interest-rate. In addition, the BoE has reconstructed global real interest rates going back to the 14th century, covering 78% of advanced
economy GDP. The study points out that currently depressed sovereign real rates are in fact converging ‘back to historical trend’ and real rates could soon enter
permanently negative territory. https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-
suprasecular-decline-1311-2018
9 Ring-fencing separates banks’ retail banking activities from their wholesale and investment banking activities, with the intention of protecting depositors’ money
should the investment bank run into trouble.
10 https://www.statista.com/statistics/386301/uk-average-mortgage-interest-rates/
11 https://www.statista.com/statistics/615037/mortgage-interest-rate-europe/
12 Deloitte estimates, m2paris.fr, ONS, Federal Reserve Economic Data, Hong Kong Statistics
13 Deloitte estimates, Observatoire des Loyers, m2paris.fr, ONS, Federal Reserve Economic Data, Hong Kong Statistics
14 Deloitte estimates, Guthmann Estate, kyero.com, Barometro Casa Sapo, Global Property Guide, Wuest Partner
15 In 2012, Spain took €41 billion of a €100 billion package of aid to rescue a number of banks that were crippled by bad loans from the collapse of a property and
construction bubble and to form a so-called bad bank to dispose of property and loans whose value has plunged.
16 In 2011, Portugal reached an agreement on a bail-out from the EU and the International Monetary Fund, asking for financial assistance worth €78 billion.
17 Deloitte estimates, thelocal.de, Guthmann Estate, BCN Advisors, kyero.com, Barometro Casa Sapo, Global Property Guide, Wuest Partner
18 Statistics Portugal
19 http://www.cbrates.com/, m2paris.fr, Guthmann Estate, kyero.com, Barometro Casa Sapo, Global Property Guide
20 http://www.cbrates.com/, ONS
21 http://www.cbrates.com/, Federal Reserve Economic Data
22 Deloitte estimates, OECD, m2paris.fr, ONS, Federal Reserve Economic Data, Hong Kong Statistics
23 Deloitte estimates, OECD, Observatoire des Loyers, m2paris.fr, ONS, Federal Reserve Economic Data, Hong Kong Statistics
24 Deloitte estimates, OECD, Guthmann Estate, kyero.com, Barometro Casa Sapo, Global Property Guide, Wuest Partner
25 Deloitte estimates, OECD, thelocal.de, Guthmann Estate, BCN Advisors, kyero.com, Barometro Casa Sapo, Global Property Guide, Wuest Partner
26 Deloitte estimates, Eurostat Knight Frank, Fed, Hong Kong Statistics
27 Nominal residential property price index for Singapore (2010=100)
28 https://www.theguardian.com/politics/2010/mar/29/second-home-allowances-first-class-travel-mps-expenses
29 This risk can be quantified as: probability*vulnerability*value. See Bienert and Hirsch (2013), Risikoabschätzung der zukünftigen Klimafolgen in der Immobilien-
und Wohnungswirtschaft
30 Takáts (2012), Aging and housing prices; Essafi and Simon (2016), Housing market and demography, evidence from French panel data; Hiller and Lerbs (2016),
Aging and urban house prices
31 The Efficiency of the Market for Single-Family Homes, Karl E. Case and Robert J. Shiller (1989) https://www.nber.org/papers/w2506.pdf
32 Central bank stress-testing of banks now routinely includes an adverse scenario for residential real estate prices: down 25% in the US, 27.7% in the
Eurozone and 33% in the UK in 2018 tests. While most banks have passed these tests, the significant hit to capital levels forecast reinforces our view that
stronger macro-prudential measures are here to stay, https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2018/november-2018.
pdf?la=en&hash=7239DE596DD5DB14BEB17E1141C2CDEB73A8623C#page=9

28
 Ladder or snake? |
 A decade after the Global Financial Crisis, where next for residential property prices?

Contacts
Margaret Doyle
Partner
madoyle@deloitte.co.uk
+44 (0) 20 7007 6311

Dr Alexandra Dobra-Kiel
Manager, Banking & Capital Markets Insights Lead UK
adobrakiel@deloitte.co.uk
+44 (0) 20 7303 0558

29
This publication has been written in general terms and we recommend that you obtain professional advice
before acting or refraining from action on any of the contents of this publication. Deloitte LLP accepts no
liability for any loss occasioned to any person acting or refraining from action as a result of any material in this
publication.

Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675
and its registered office at 1 New Street Square, London EC4A 3HQ, United Kingdom.

Deloitte LLP is the United Kingdom affiliate of Deloitte NSE LLP, a member firm of Deloitte Touche Tohmatsu
Limited, a UK private company limited by guarantee (“DTTL”). DTTL and each of its member firms are legally
separate and independent entities. DTTL and Deloitte NSE LLP do not provide services to clients. Please see
www.deloitte.com/about to learn more about our global network of member firms.

© 2020 Deloitte LLP. All rights reserved.

Designed and produced by 368 at Deloitte. J19280