Ultimate Guide to Housing Bubbles Around The World

Mon Aug 12 00:12:48 BST 2013

Thursday, 8 August 2013
Ultimate Guide to Housing Bubbles Around The World
http://www.torontocondobubble.com/2013/08/ultimate-guide-to-housing-bubbles.html

Is real estate local or global? I think the 
answer is both. While everyone would agree that 
real estate values depend on location, few would 
buy into the idea that real estate prices tend to 
follow a synchronous global pattern.

If one were to look at historic real estate 
values across multiple countries, one would find 
that housing booms and busts tend to occur at 
about the same time. For instance, during late 
'80s there was a housing boom in Japan, 
Switzerland, United Kingdom, Nordic Countries and 
cities such as Paris and Toronto. In all of the 
above examples, the housing boom eventually ended with the crash.

Below I compiled a list of countries that have 
experienced housing bubbles in the past 30 years. 
Before you start reading this article, I would 
like you to quickly skim through the housing 
charts for each country and notice the pattern! 
Once you're finished that, it is up to you to 
discover all of the striking similarities between 
countries as well as some strange differences.

That's right, Germany does not have a housing 
bubble and, in fact, its never had one! Why? Here are the main three reasons:

1. Germans rent, they do not own. The German home 
ownership rate was just 41% in 2004 but since 
then it went up to 59% in 2012 according to third 
party polls. If the last number is correct, that 
can be worrisome as real estate prices in Germany 
have been increasing since 2011 to present day.

2. Germany has a responsive land policy. It is a 
lot simpler to get a building permit in Germany 
than in the UK -  where there are restrictive 
land policies. A good example of a restrictive land policy is a greenbelt.

3. Strict Lending Standards. The absolute minimum 
down payment is 20%, which comes at a premium 
interest rate. As a result, 40% down payments are 
more frequent. Over 90% of mortgages are fixed.

Did you ever wonder how on earth Germany managed 
to bail out half of the Eurozone? The answer lies 
in the fact that Germany didn't have to bail 
itself out as it had no housing bubble. If 
Germany had a housing bubble, Europe would be in 
a much worse position than it currently is.

German Housing Market Statistics

Real Estate Undervalued versus Rents by -15% (OECD, 2013)

Real Estate Undervalued versus Incomes by -21% (OECD, 2013)

US Housing Bubble Statistics:

Average Annual Real Price Growth: 5.7% between 2000 and 2006
Real Home Price Growth: 42.4% between 2000 and 2006
Real Home Price Decline:  -24% between 2006 and 2011

Home Price Growth: 106% between 2000 and 2006 
according to composite-20 Case-Shiller Index
Home Price Decline: -28% between 2006 and 2013 
according to composite-20 Case-Shiller Index

Net-wealth: declined by -21% between 2006 and 2011
Non-Financial wealth: (including real estate) 
declined by -34% between 2005 and 2011
Financial Assets: declined by -13% between 2007 and 2011
Household Debt: peaked in 2007 at 136.8% and came down to 116.8% in 2011

Real Estate Undervalued versus Rents by -1% (OECD, 2013)

Real Estate Undervalued versus Incomes by -15% (OECD, 2013)

So what caused the housing bubble in the United 
States in the first place? Some say it was greed, 
others say it was a genuine attempt by the 
government to fulfill every American's dream of owning a home.

Realistically, there were many different factors 
that contributed to the development of the 
bubble. One author summarized key causes like this:

1. Interest Rates Manipulation by the FED - 40 
year low mortgage rates during the onset of the bubble

2. Home Flipping and Speculative Investments  - get rich quick scheme

3. Panic Buying - buy now or be priced out forever

4. Bad Lending Standards - sub prime mortgages, etc...

5. Media Propaganda - media played a big role pumping up the bubble

Justifications for no housing bubble:

Bernanke famously said in 2005 that there is no 
housing bubble in the USA as housing reflects strong economic fundamentals.

Housing prices are driven by strong economic 
growth, rising incomes and 40 year low mortgage 
rates according to Frank Nothaft (2005), chief economist at Fredie Mac.

"People who talk about a bubble are blowing 
smoke," said real estate economist Michael Carney in 2005.

"Another mantra of housing bulls in America is 
that national average house prices have never 
fallen for a full year since modern statistics began" - The Economist

The continuing shortages of housing inventory 
are driving the price gains. There is no evidence 
of bubbles popping.  David Lereah, NAR mouthpiece/economist  August 2005

The steady improvement in home sales will 
support price appreciation despite all the wild 
projections by academics, Wall Street analysts, 
and others in the media.  David Lereah, NAR 
mouthpiece/economist  January 10, 2007

U.S. Housing Bubble 2.0

Recently there was a lot of chatter about a new 
housing bubble being formed in the United States. 
Business Insider claims that the second U.S. 
housing bubble began to inflate in July 2012 as 
since then the median price of a new home has 
increased by $23 for every $1 in median income. 
Note that since 1967 the median home price in 
America increased by anywhere between $3.37 to 
$4.09 for every $1 increase in median income 
(excluding the period of the first bubble). 
Currently, the rate of growth of new home prices 
is faster than during the first bubble.

The question is, will this sort of price growth 
last? With mortgage rates going up and mortgage 
applications hitting a 19-month low it doesn't look like it will.

As of 2013, home prices are down 27% in the UK 
when you adjust for inflation according to the 
Financial Times. Real prices are also down 15% in 
Greater London. Yet falling prices have not 
helped affordability because real wages were 
falling too! In places like Oxford, homes still 
cost 10 times the average income. The UK property 
bubble still has a long way before it fully deflates.

Eventually UK home prices will normalize with 
incomes and it could happen in three ways:

1. Incomes rise
2. Nominal prices fall sharply
3. Nominal prices stay steady while real prices 
fall until it reaches equilibrium with incomes

Ironically, the British government doesn't like 
either scenario and is doing everything it can to 
re-inflate the housing bubble.

For example, recently the government introduced a 
Help-To-Buy program which includes an element 
that underwrites mortgages under 600,000 pounds - 
which would allow individuals to buy a home with 
a deposit as low as 5%. Basically, Brits want to 
replicate CMHC in Canada as to provide mortgage 
insurance so people can buy a house with as little as a 5% down-payment.

Critics immediately pointed out that this may 
further increase home prices and even re-inflate 
the British housing bubble that hasn't fully 
burst yet. Other critics point out that "the 
housing market needs help to supply, not help to 
buy, and the extension of this scheme is very 
dangerous 
 the world must have gone mad for us 
to now be discussing endless taxpayer guarantees 
for mortgages." The truth is that home building 
in UK has fallen to its lowest level since the 
1920s. The British government needs to fix its 
supply issue first before tinkering with the demand side of the equation.

British Housing Bubble Statistics

Average Annual Real Price Growth: 7.5% between 1996 and 2007

Household debt to income ratio - 155% at peak (2008)

Real Estate Overvalued versus Rents by 31% (OECD,2013)

Real Estate Overvalued versus Incomes by 22% (OECD,2013)

All it took to start bubble mongering was a 27.5% 
increase in Swiss home prices between 2007 and 
2012.  Recently the Chairman of Swiss Central 
Bank sparked a comment that rising housing prices 
may result in a housing bubble, and that a rise 
in real estate prices is one of the greatest 
threats to the economy. Yet, the central bank 
continues to keep ultra-low interest rates in 
order to prevent foreign speculative capital 
boosting the Swiss Frank and thus hurting the economy.

Swiss academics are also throwing around housing 
bubble warnings. According to Bloomberg:

  As interest rates have fallen, many people who 
could not afford it before can buy a house, 
Alexandre Ziegler, an assistant professor of 
finance at the University of Zurich, said. This 
has fueled demand and house prices, and could 
eventually result in a real-estate bubble.

Just like Toronto, Switzerland had a massive 
housing bubble in the late '80s. Prices had gone 
up by 38% from 1985 to 1989, and then returned to 
1985's level by1995. Just like they are today, 
housing bubbles were a global phenomenon in late '80s.
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