WHEN Covid sent the UK economy into lockdown in 2020, the government jumped in to help the property market by cutting a tax on purchases. The temporary measure triggered a kind of mania among buyers, who responded by bidding up average prices by £31,000 —more than double the maximum tax saving.
“There are parallels between now and then,” said Manoj Pradhan, founder of research firm Talking Heads Macroeconomics and a former Morgan Stanley economist. But soaring inflation means “things could be significantly worse. The overall increase in and level of debt is quite high compared with that time. The sensitivity to interest rate rises is huge.”
The most frenzied speculation this time around took place in the suburbs and outlying cities near Toronto to which people flocked when Covid hit, searching for more space. Property developers emerged there in the 1980s after it became one of the first areas of China to liberalize its economy, drawing migrants seeking work. That in turn boosted demand for housing, minting the country’s first batch of property entrepreneurs, including Soho China Ltd.’s founder Pan Shiyi.
According to George Magnus, a research associate at Oxford University’s China Centre, the underlying fundamentals look “pretty glum for the foreseeable future.” The firm’s combined capitals index, which includes home values in Australia’s eight capital cities, dropped 5.5 percent in the past five months. Over the same timeframe in the 1990s downturn, housing values were down 2.9 percent. It’s even worse in Sydney, where prices have fallen for eight consecutive months and are now 9 percent off the peak.
House prices are falling—at a record pace based on some measures—and highly leveraged commercial property companies are coming under pressure from rising rates, which has parallels to the 1990s financial crisis. That was announced as part of a big tax giveaway that hurled UK markets into turmoil. Bond yields jumped, contributing to soaring mortgage interest rates, and a number of lenders even pulled home loan products off the market.