US housing market not stretched - HSBC

Among the major economies, in the US the financial stability risks posed by the property market are much less pressing than in its northern neighbour, according to analysts at HSBC.

Key Quotes

“US house prices have just recovered to their per-crisis peak, but, given the household sector deleveraging that has been undertaken since the crisis, it is not flashing red on our standard measures of financial stability risks stemming from the housing market. However, equity and credit markets in the US and Europe do seem to have reached valuations that are not obviously consistent with the underlying performance of the economy. Policymakers are increasingly alert to the risks, with the minutes from the July FOMC meeting specifically citing that “vulnerabilities” from rising asset valuations had become “elevated”.”

“At least US corporate earnings expectations for 2017 have finally stopped disappointing expectations, but valuations are looking increasingly stretched on the cyclically-adjusted Shiller historical PE ratio – in the past 100 years or so, they have only been higher in 1929 and 2000.”

“Moreover, the profit share in US GDP is very high – both relative to history, but also for this stage of the cycle. This could clearly fall, and if so, it would affect equity valuations, if growth were to disappoint or wage growth revive. Meanwhile in credit markets, record high foreign ownership of USD credit and a new record for global High Yield issuance are signs that optimism – ie risk taking – might be in danger of becoming excessive, encouraged by the expectation that as long as inflation remains low the monetary policy outlook will be predictably benign.” 

“There are plenty of other indications of financial exuberance around the world. None of them individually signal an immediate threat but hefty house price increases, strong credit growth, tight credit spreads, stretched equity valuations, a surge in IPOs relating to new technologies and of bond issues of non-investment credits have, in the past, all been good warning signs of future financial and economic shocks ahead.”