Bubble Danger: NZ (1) & Australia (4) in Top 5

Bloomberg: New analysis by Bloomberg Economics shows that 19 OECD countries have combined price-to-rent and home price-to-income ratios that are higher today than they were ahead of the 2008 financial crisis — an indication that prices have moved out of line with fundamentals.

New Zealand at Top of Risk Ranking

Five gauges of property risk for OECD member and accession countries

While that doesn’t make a housing crisis a certainty, it is an obvious vulnerability as central banks raise interest rates and mortgage repayments move higher. That’s another burden for a global economy already slowing down and in danger of falling into a recession.

Falling home prices erode household wealth, dent consumer confidence and potentially curb future development. Animal spirits are typically tamed when people are faced with higher repayment costs on an asset that’s losing value. And property construction and sales are huge multipliers of economic activity around the world.

The 2008 crash in the US and Western Europe left a legacy of bad loans, negative equity and broken banks that took years to clean up.

In the Bloomberg Economics analysis, housing markets in New Zealand, the Czech Republic, Australia and Canada rank among the world’s bubbliest and are particularly vulnerable to falling prices. Portugal is especially at risk in the euro area, while Austria, Germany and the Netherlands are also looking frothy.

Other analysts are making similar warnings. In Asia, South Korea house prices also look vulnerable, according to an analysis by S&P Global Ratings. Goldman Sachs Group Inc. economists wrote in a report that the signals from home sales typically precede prices by about six months, indicating that several countries are likely to see further declines in values.

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