- Australia, Canada, New Zealand, Hong Kong and Sweden have seen their housing prices more than tripled since 2000, according to BIS housing price series. The BIS series does not include Chinese data. Arguably the rally in Chinese property market – particularly those of Tier 1 cities – would comfortably dwarf the countries mentioned above.
- There seems to be common driver behind the housing price boom of the aforementioned countries, with notable exception being Sweden. And that is the Chinese purchase of housing in China (Mainland and Hong Kong) as well as migration-friendly countries (Canada, Australia, New Zealand). Residential property investment – particularly in Tier 1 Chinese cities and overseas developed countries) – as store of wealth – largely explains the mentality of Chinese buyers.
- Therefore, the “Achilles Heel” of Chinese housing market is its capital account policy. A radical change in the policy – e.g. allowing Chinese households to move domestic wealth and invest overseas – could significantly cool down the domestic property market, as households would face much more choices to park their wealth. (Btw, the Chinese policymakers know this vulnerability too well, making them reluctant to open Chinese capital account).
- The next question is, what makes Sweden join the top list of housing market boom without large Chinese investment? What is the “Achilles Heel” of Swedish property market, whose change would drastically weigh on the housing price – and hence policymakers would be really reluctant to adopt in the near future?
- Broadly speaking, there are three factors driving housing price: supply, people and money. By definition, the “Achilles Heel” is not something that happens only very gradually, such as increasing land supply or reducing population growth. Therefore, the “Achilles Heel” can only be something about money, like the case in China.
- Notably the total debt as a share of total asset has gone down among Swedish households despite rising level of household debt. What is the money or capital related policy that affects the Swedish housing market? I yet to have an answer about which I am as confident as the one I suggested on China. I will come back to this issue in the future. For the moment, here are the potentially relevant drivers I could think of:
- Riksbanks’ QE, which increases net financial assets of households, though central banks’ purchase of assets happen across many developed markets.
- Mortgage interest deductibility, which affects net borrowing cost, though such policy also exists in other countries, e.g. UK.
- Large current account surplus that increases the country’s wealth, though there are many countries with higher CA than Sweden as a share of GDP, and yet the housing boom is less significant (e.g. Korea, Switzerland)
- Feedback loop: rising housing price boosts paper value of property and household assets, lowers household debt % household asset, further increases households’ ability to apply for mortgages (taking on more debt). Of course, feedback loop also works when housing prices drop
There may be other drivers that I miss about the booming Swedish housing market, e.g. property tax policy or mass population’s mentality that housing prices could only go up…..I will investigate further.