Goldman Sachs warns: someone in G-10 real estate market could go bust

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.

A graph in the report shows that New Zealand’s probability of a housing bust is just above 40 per cent, while Sweden’s is just above 35 per cent. The risk of a bust in Canada is about 30 per cent, while in Norway, Australia and Switzerland the probability is assessed at 20-25 per cent.

The eurozone is included in the bank's calculations as one entity, and because it is made up of such a wide variety of countries and economies, average scores for the eurozone show nothing alarming.

Much like most of other counties in the study, Canada constructed too many new homes. The overbuilding, however, is seen not in the hottest markets of Canada – at Vancouver and Toronto – but mainly in Saskatchewan and Alberta, where demand for new homes fell following the oil price collapse.

“We would stress that in the case of Canada — a focus for many investors at the moment — there are important regional disparities to keep in mind,” said the report.

New Zealand house prices have surged 60 per cent since 2010, while Sweden’s have risen 41 per cent, according to data compiled by the Bank for International Settlements. New Zealand’s central bank last week forecast house-price inflation would slow to 5 per cent this year from 14 per cent in 2016, but remain positive through mid-2020.

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.

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.

“In general, we do not expect imminent problems in the G10 real estate markets, but current imbalances could exacerbate cyclical weakness down the road,” the researchers say.