Stimulus money from the Central Banks has been making its way out of the intended countries into the international real estate market, with luxury properties in Canada, Norway and Hong Kong skyrocketing since 2008. Does this set the stage for a precarious real estate bubble abroad? And if so, how does this affect Manhattan real estate?
A source of this wealth is from stimulus packages generated by the central banks, originally intended to kick-start the economies of their own countries. Instead of the money being spent domestically, it is finding its way into international real estate. Canada, Switzerland, Hong Kong and Oslo were ripe destinations, due to their political stability and low levels of debt. Internationally, they are seen as resistant to economic turmoil and Europe’s sovereign-debt crisis.
The central banks have spent more than $4 trillion in an attempt to revitalize the economy in North America, Europe and Asia. The reduced borrowing cost did little to increase buying in the countries that needed it. Instead the funds were diverted overseas to more stable climates.
The spree of buying has been fueled by the Federal Reserve, which has been keeping US interest rates at record lows. The Hong Kong dollar is tied to the US Dollar, so that affects them as well. Canada, following the suit off its southern cousin, has kept rates close to zero.
The specter of cheap credit is what led to the collapse of the housing markets in the U.S., Ireland and Spain. The fall of these once-booming countries, in turn, triggered the global financial crisis. It’s a warning to those who seem hell-bent to repeat the same mistakes in Vancouver, Oslo, Switzerland and Hong Kong.
In Hong Kong, the price of property has doubled in the last five years. The money once set aside to buy apartments is now hardly enough for a down payment. Rock bottom borrowing rates and a limited amount of space to build has driven prices through the roof.
The bubble’s walls have grown thin. A combination of reduced demand from Europe’s debt crisis and reduced demand for goods from China and Hong Kong, poses great risk of an abrupt correction in the city’s real estate market.
In Vancouver, the market has seen rapid growth until the last few months. Housing prices have doubled in the last ten years, with a 34 percent increase since January 2009 alone: while government bonds are at their lowest levels since 1950. However, in the last two months, there is talk that the bubble has popped. Housing sales are down 12 percent from what they were last year in this time, and listings are up. In May, prices were down on average $150,000 from what they were in 2011. The luxury real estate market of Vancouver in particular has flat-lined. Analysts are comparing the current climate as similar to what happened in 2008.
The safe bets in international real estate are in New York, London and San Francisco, where investors are competing for a limited number of properties.