Goldman Sachs report says Swedish and New Zealand house markets most at risk
The Swedish and New Zealand housing markets are the most at risk of a correction among the so-called G-10 economies, according to Goldman Sachs.
In a report on house prices in G-10 nations - those with the 10 most-traded currencies in the world - Goldman finds they are most elevated in small, open economies such as Sweden and New Zealand.
The investment bank said there is a 35-40pc chance of a housing "bust" in each country over the next two years, which it defines as house prices falling 5pc or more after adjustment for inflation.
Goldman compares house-price levels across economies using three standard metrics: the ratio of house prices to rent, the ratio of house prices to household income and house prices adjusted for inflation.
"Using an average of these measures, house prices in New Zealand appear the most over-valued, followed by Canada, Sweden, Australia and Norway," it said.
"According to the model, the probability of a housing bust over the next five to eight quarters is the highest in Sweden and New Zealand at 35 to 40pc."
A graph in the report shows that New Zealand's probability of a housing bust is just above 40pc, while Sweden's is just above 35pc. The risk of a bust in Canada is about 30pc, while in Norway, Australia and Switzerland the probability is assessed at 20-25pc.
New Zealand house prices have surged 60pc since 2010, while Sweden's have risen 41pc, according to data compiled by the Bank for International Settlements.
New Zealand's central bank last week forecast house-price inflation would slow to 5pc this year from 14pc in 2016, but remain positive through mid-2020.
Goldman said the pace of credit growth over the prior five years is an important indicator of asset-price busts.
Its housing bust model also includes the house price-to-rent ratio, past changes in real house prices, the investment-to-GDP ratio, real GDP growth, and inflation.
"The probability of a house-price bust has been picking up across the smaller G-10 markets in recent years - a result of rising prices and high credit growth," it said.
While residential investment in Sweden and New Zealand are high, immigration booms and population growth in both countries are supporting construction demand, Goldman said. "In contrast, Australia, Norway, and Canada appear overbuilt," with home- building activity outstripping the demographic demand for housing, it said.
Household debt relative to disposable income stands at record levels in all the countries it looked at, but Goldman said debt servicing ratios have remained relatively low due to record-low interest rates. The bank said its model is "just one tool" and has "a few key drawbacks," including predicting housing busts too often.
However, taking the model output and other data into account, "we see reason for some concern about house-price developments in the small open G-10 economies," it said.
"Prices do appear overvalued and credit growth has been high - traditional warning signs of real house-price declines."
Sweden had already been identified prior to the Goldman report by Moody's Investor Services as one of four countries where a "potential housing market correction" was listed as a risk.
Last month, analysts at Danske Bank A/S warned investors to take a closer look at the potential risks for biggest mortgage lender, Swedbank AB, arising from that, noting that its business model leaves it more exposed than others to any decline in the country's property market.
"It all comes down to the Swedish housing market and the dynamics there," Matti Ahokas, an analyst at Danske in Helsinki, told Bloomberg. "Given how strong it has been - and Swedbank has the biggest exposure - it's difficult to see anything could improve and, if anything, there's a risk of a correction."
Though that "wouldn't be the end of the world," Ahokas said it clearly "wouldn't be a positive driver".
Referring to the warning issued by Moody's Investor Services, Ahokas said it was something "you can't disregard".
However, Swedbank's chief risk officer, Helo Meigas, said that the lender is confident "about the credit quality in the mortgage market," in comments made during a conference call after the bank published its first-quarter results.
Meigas said Swedbank saw signs customers are better able to withstand house-price swings "because of the general increase of the households' wealth," but also because mortgage costs and housing costs "are at a very low level".
"If house prices continue to go up, then the fragility of the house price itself will increase, so the probability for correction is higher," Meigas said. "At the same time, this, we believe, will primarily be affecting consumption, not whether our clients are able to pay their mortgages or not."