<< Read Part 1: Overheated Housing Markets

<< Read Part 2: Overheated Housing Markets

<< Read Part 3: Overheated Housing Markets

<< Read Part 4: Overheated Housing Markets

First, a recap. Interest rates were lowered in the six export-sensitive economies at the onset of the GFC and again in 2014-16, causing easy and cheap credit and housing prices to soar. Their housing markets, except for in Iceland, went through a relatively brief price correction before becoming even more overvalued.

After re-indexing the OECD data to Q1 2010 base, all six house price indices and all price-to-rent ratios except for Australia are overvalued. Price-to-income ratios (not shown) are well above their base levels as well. I showed a chart with the same two measures for the U.S. economy. If indexed to Q1 2010 as the base date (chart shows 2015 as base), then the real house price index in the U.S. is overvalued.

The global theme of low interest rates and easy monetary policy is likely coming to an end. Given the above, these economies are particularly vulnerable to higher interest rates and will, inevitably, follow rate hikes of the major central banks. A price correction in their housing markets is probably imminent which could be triggered by tighter than expected monetary policy. If it materializes, it could weaken household finances, depress private demand and hurt corporate and bank earnings.