Deep property cracks will shake other markets

The Fed's tapering of QE will affect the US housing market in 2014 as lending volumes decline and mortgage rates rise. Australia may see pressure on interest rates but our major threat is still a couple of years off.

Home owners in Australia, the UK, the US and Germany are set to enjoy 2014 according to last night's report from the global ratings agency Fitch. But there are global cracks appearing, which will become apparent in 2015 and beyond. And the forces behind some of those cracks will affect share markets.

Let’s start with the US. While Fitch expects a ‘modest’ rise in 2014 American house prices it expects lending volumes to decline in the US as mortgage rates rise and refinancing activity declines. In other words the 'taper' to reduce US money printing is going to affect the American housing industry in 2014, which in turn will affect consumer confidence. And that taper fear affected the US stock markets last night and is likely to be repeated again and again.

In Australia, Fitch also expects a "modest" rise in 2014 dwelling prices and if it is right about the rise being only modest then there will be little pressure to increase Australian interest rates unless the dollar declines sharply. Our housing price threat will come in two or three years if the supply of apartments in Sydney and Melbourne is boosted much faster than demand– as seems likely (Sydney's property dam is about to burst, January 21).

But behind these year to year variations there is a fundamental flaw in the level of dwelling prices in major cities. It is becoming harder and harder for people to afford living in their own houses in big cities like London, New York, San Francisco and Tokyo. And, of course, the same thing is happening in Australia. In 2014 affordability will decline further in the major cities although outside these cities prices rises are more modest.

While endorsing the major city trends, Fitch issues a warning: “We do not believe cities are immune from cyclical house price movements and their consequences. Longer-term average annual house price growth cannot excessively disconnect from incomes.”

There are many reasons why dwelling prices in the major cities are rising faster than both incomes and non-metropolitan areas but one of them is Chinese investment, which has not only been strong in Sydney and Melbourne but has also affected dwelling markets like New York and London.

Meanwhile Fitch expects the best 2014 house prices increases to take place in Germany and the UK due to low interest rates, sound GDP growth and improved credit availability. In Canada, house prices will be flat due to government measures to moderate the housing market. But further house price declines are expected in the Netherlands and Italy and larger falls are likely in Greece and Spain. Fitch is hopeful of some relief from house price declines in 2015 for these beleaguered countries.