What happens in New York City, London, Tokyo, Beijing and Shanghai is now changing the prices of homes in Australia. Picture: Paul Miller/AAP
What happens in New York City, London, Tokyo, Beijing and Shanghai is now changing the prices of homes in Australia. Picture: Paul Miller/AAP

OUT OF CONTROL: Secret forces behind high house prices

HOUSE prices are increasingly out of local hands - instead they vary at the whim of global forces we can't control.

This is the conclusion of a major new review of the evidence by the International Monetary Fund.

It's not just citizens who find control slipping through our fingers. Governments do too. Global investors and foreign central banks are now a big part of what drives house prices. What happens in New York City, London, Tokyo, Beijing and Shanghai is now changing the prices of homes in Australia.

"Increasingly, house prices have become determined at the global level," the IMF says.

Part of the reason is low interest rates around the world, the IMF says. The other reason is more and more foreign money flooding in. That foreign money is not just looking for a home - it wants a return on investment.

"Housing serves a dual purpose," says the IMF "It is a residential good for the local population and an investment good for investors across the globe."

Private equity firms, real estate investment trusts, and institutional investors appear to have invested more and more in the last few years, the IMF says, with Melbourne and Sydney among their favourite targets.

LESS LOCAL CONTROL

When the prices on your street get crazy, foreign factors are not the only reason of course. House prices are a blend of local and global factors. But the global factors keep getting bigger every year. They now explain 35 per cent of house prices, according to the IMF, and that keeps rising.

The global factors don't just hit Australia. They affect the whole world. If prices are rising in other cities around the world, they're more and more likely rising here. When they're falling elsewhere, they're now more likely to be falling here.

You can see the effect in this next graph. It shows the period from 1991 to 2016, and the red line shows house price synchronisation is going up.

The red line shows house price synchronisation is going up. Picture: Supplied
The red line shows house price synchronisation is going up. Picture: Supplied

What's especially interesting about this graph is that the red line has been rising faster than the green line. That tells us that the correlation between major cities is higher than the correlation between countries. What happens in New York matters far more in Sydney and to some extent Melbourne than across the country.

Some cities are especially prone to getting their house prices lifted by the global tide, says the IMF.

It reckons the issue is most pronounced in "major cities in advanced economies that are usually more integrated with global financial markets but also where local supply constraints may be more binding".

And if that doesn't sound like a perfect description of Sydney, then I don't know what does.

Own a place near Bondi Beach? You should remain hyper-alert to moves from the People's Bank of China and the US Federal Reserve. But if you live in the bush, it doesn't mean you can put down that copy of the Wall Street Journal and relax.

WHAT GOES UP TOGETHER COMES DOWN TOGETHER … AND RUINS EVERYTHING

House price synchronisation is especially strong during big crashes, the IMF research says. What that means is that a big ugly crash in house prices in America could easily affect us. Sydney would probably cop it worst, and Melbourne second.

But the rest of Australia would not escape unscathed. A big global crash in house prices would probably screw up the whole economy and also make it harder to recover from any recession.

"In this case, a decline in external demand may exacerbate the challenges of stabilising household balance sheets, financial markets, and economic activity," says the IMF.

FRAGILE CHINA

It was bad enough in 2009 when US house prices collapsed and our economy began to wobble. China was smaller then and less relevant. If China and America were to turn down in synch now, well, there will be nowhere for Australia to hide.

If you're worried about China's economy, you should be. The RBA is.

It just dropped a big report that goes on for quite a few pages about the risks in China's economy. I read it so you don't have to - the thing they keep coming back to is risks in the financial system. There has been some seriously dodgy lending going on in China and everyone's hoping they can get things under control before it blows up into a big financial crisis.

When the prices on your street get crazy, foreign factors are not the only reason of course. Picture: Toby Zerna
When the prices on your street get crazy, foreign factors are not the only reason of course. Picture: Toby Zerna

THE GOOD NEWS

There is something we can do about these risks.

Laws to help control house prices - so-called "macro-prudential policy" can be very effective. These laws include simple things like making sure people have sufficient deposits. But they can also include those introduced in Canada, where there is a big tax on foreigners buying property.

These macro-prudential policies are like a firewall that stands between local house prices and global house prices. They don't totally insulate you from what's going on out there, but they can reduce the risk.

"Macro-prudential policy measures put in place to tame rising vulnerabilities in a country's financial sector may have the additional effect of reducing a country's house price synchronisation with the rest of the world," says the IMF.

We have tweaked our macro-prudential policies a little already. Much stronger ones could be a very good thing for Australia to consider.


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