The housing boom
The surge in house prices in many countries around the world in the recent past is raising concerns in many quarters, with many now considering it a bubble and worried over the impact on the global economy should it deflate.
In a recent article on 16 June, The Economist said the ongoing bull market in house prices is larger than the global stockmarket bubble in the late 1990s and America's stockmarket bubble in the late 1920s -- "it looks like the biggest bubble in history".
The global housing boom is widely acknowledged to be the result of low interest rates around the world. The low rates allow house-buyers to borrow cheaply and hence increase affordability, which in turn increases demand and pushes up prices.
And how prices have run up. According to The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years. And it continues to run up. Of the twenty countries whose house prices are tracked by The Economist, half of them showed gains of 10 percent or more in the most recent quarter.
In some of the countries, prices have started to moderate, or even decline. For example, in the United Kingdom, estate agents have been reporting house price declines recently. Australia appears to be suffering from price declines as well.
Other markets remain strong. France, Spain and the United States all reported double-digit price increases recently.
The housing boom has been a major factor behind the strong US economy. It helps provides jobs, not just in construction but in the financial sector. Home equity financing provides home-owners with cash to stoke consumer demand.
An end to the housing boom is likely to undermine the US economy, and with it, the rest of the global economy which relies on it for growth in end demand. So the question of whether the boom is about to end is one that interests many.
So far, there is little indication that the end is near, at least in the US. Just last week, US housing starts in May was reported to have risen 0.2 percent. While permits for future groundbreaking, an indicator of builder confidence, fell 4.6 percent, the National Association of Home Builders/ Wells Fargo Housing Market Index, another indicator of builder confidence, rose to 71, its highest level since December 2004.
Nevertheless, The Economist is not sanguine about the outlook. It noted that prices are over-valued, with house prices at record levels in relation to rents in the US and many other countries.
Similarly, Paul Kasriel of The Northern Trust Company pointed out in a commentary on 17 June that, in spite of low mortgage rates, high prices mean that housing affordability in April, as measured by the National Association of Realtors' index, fell to its lowest level since October 1991. If interest rates were to spike up, things would get worse for the housing market.
However, in its article, The Economist warned that a big rise in interest rates might not even be necessary to trigger a decline in house prices. "British home prices started to fall in the summer of 2004 after the Bank of England raised rates by a modest one and a quarter percentage points. Since 2002, the Reserve Bank of Australia has raised rates by exactly the same amount and unemployment is at a 30-year low, yet home prices have fallen."
That said, it is not always easy to tell exactly when a bubble will pop, even assuming you correctly recognise a bubble when you see one.
Some have pointed to the fact that real estate is now on the cover of magazines like Time -- a bad omen.
As Caroline Baum wrote in her Bloomberg article on 17 June, "by the time a financial phenomenon hits the cover of a general-interest news weekly, it's all over but the shouting". Baum said that the magazine-cover indicator has an 80 percent or better accuracy rate over eight decades.
And yet, Baum cited Paul McCrae Montgomery, president of Montgomery Capital Management, in warning that caution is needed in interpreting the indicator. Montgomery said that Time's housing cover may serve as a better warning for housing stocks rather than house prices themselves, since such stocks rise and fall "well in advance of real estate activity itself".
Mongtomergy also thinks that Wall Street's participation in the housing boom has been too limited. "Before this bull market is over, Wall Street will try to exploit it significantly more than it has done so far," he said.
Baum also cited Jim Bianco, president of Bianco Research in Chicago, in saying that "bubbles don't burst when everyone is talking about a bubble". A fair point, but don't rely too much on it.
In reality, bubbles are often fairly well-recognised in advance and warnings may be sounded both early as well as late.
The stock market and Internet bubble of the 1990s, for example, was recognised as a bubble among many investors and analysts even while the bubble was inflating, and even -- as we now know -- among those touting the bubble stocks. Federal Reserve chairman Alan Greenspan declared "irrational exuberance" as early as 1996. The stock market, however, continued to be irrational and exuberant for another four more years. When Yale economist Robert Shiller then declared "irrational exuberance" again in a book in 2000, this time, the bubble burst.
So those analysing the housing boom face exactly the same problem. Even if they are able to correctly identify a bubble, it is difficult to identify exactly when the bubble will burst.
It is fun trying, though. And potentially profitable.
In a recent article on 16 June, The Economist said the ongoing bull market in house prices is larger than the global stockmarket bubble in the late 1990s and America's stockmarket bubble in the late 1920s -- "it looks like the biggest bubble in history".
The global housing boom is widely acknowledged to be the result of low interest rates around the world. The low rates allow house-buyers to borrow cheaply and hence increase affordability, which in turn increases demand and pushes up prices.
And how prices have run up. According to The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years. And it continues to run up. Of the twenty countries whose house prices are tracked by The Economist, half of them showed gains of 10 percent or more in the most recent quarter.
In some of the countries, prices have started to moderate, or even decline. For example, in the United Kingdom, estate agents have been reporting house price declines recently. Australia appears to be suffering from price declines as well.
Other markets remain strong. France, Spain and the United States all reported double-digit price increases recently.
The housing boom has been a major factor behind the strong US economy. It helps provides jobs, not just in construction but in the financial sector. Home equity financing provides home-owners with cash to stoke consumer demand.
An end to the housing boom is likely to undermine the US economy, and with it, the rest of the global economy which relies on it for growth in end demand. So the question of whether the boom is about to end is one that interests many.
So far, there is little indication that the end is near, at least in the US. Just last week, US housing starts in May was reported to have risen 0.2 percent. While permits for future groundbreaking, an indicator of builder confidence, fell 4.6 percent, the National Association of Home Builders/ Wells Fargo Housing Market Index, another indicator of builder confidence, rose to 71, its highest level since December 2004.
Nevertheless, The Economist is not sanguine about the outlook. It noted that prices are over-valued, with house prices at record levels in relation to rents in the US and many other countries.
Similarly, Paul Kasriel of The Northern Trust Company pointed out in a commentary on 17 June that, in spite of low mortgage rates, high prices mean that housing affordability in April, as measured by the National Association of Realtors' index, fell to its lowest level since October 1991. If interest rates were to spike up, things would get worse for the housing market.
However, in its article, The Economist warned that a big rise in interest rates might not even be necessary to trigger a decline in house prices. "British home prices started to fall in the summer of 2004 after the Bank of England raised rates by a modest one and a quarter percentage points. Since 2002, the Reserve Bank of Australia has raised rates by exactly the same amount and unemployment is at a 30-year low, yet home prices have fallen."
That said, it is not always easy to tell exactly when a bubble will pop, even assuming you correctly recognise a bubble when you see one.
Some have pointed to the fact that real estate is now on the cover of magazines like Time -- a bad omen.
As Caroline Baum wrote in her Bloomberg article on 17 June, "by the time a financial phenomenon hits the cover of a general-interest news weekly, it's all over but the shouting". Baum said that the magazine-cover indicator has an 80 percent or better accuracy rate over eight decades.
And yet, Baum cited Paul McCrae Montgomery, president of Montgomery Capital Management, in warning that caution is needed in interpreting the indicator. Montgomery said that Time's housing cover may serve as a better warning for housing stocks rather than house prices themselves, since such stocks rise and fall "well in advance of real estate activity itself".
Mongtomergy also thinks that Wall Street's participation in the housing boom has been too limited. "Before this bull market is over, Wall Street will try to exploit it significantly more than it has done so far," he said.
Baum also cited Jim Bianco, president of Bianco Research in Chicago, in saying that "bubbles don't burst when everyone is talking about a bubble". A fair point, but don't rely too much on it.
In reality, bubbles are often fairly well-recognised in advance and warnings may be sounded both early as well as late.
The stock market and Internet bubble of the 1990s, for example, was recognised as a bubble among many investors and analysts even while the bubble was inflating, and even -- as we now know -- among those touting the bubble stocks. Federal Reserve chairman Alan Greenspan declared "irrational exuberance" as early as 1996. The stock market, however, continued to be irrational and exuberant for another four more years. When Yale economist Robert Shiller then declared "irrational exuberance" again in a book in 2000, this time, the bubble burst.
So those analysing the housing boom face exactly the same problem. Even if they are able to correctly identify a bubble, it is difficult to identify exactly when the bubble will burst.
It is fun trying, though. And potentially profitable.
<< Home