Global housing bubbles unite: How easy debt has created the first ever worldwide housing boom and bust. The busted, the leveled, and the booming.
Economic history is a fascinating subject. Yet in our modern day of instant news and second to second market analysis, it seems like the media is bent on skimming over on only what is going on at the moment. Even the deepest financial crisis since the Great Depression is now gone into the vortex of cultural amnesia. What is interesting however, is that many countries around the world being incredibly different culturally, went down into the rabbit hole of housing mania as well. If you ever think Southern California home prices are outrageous, you need only look at Northern California. If you live in the Bay Area, all you need to do is look at Canada. There has never been, from all the history I’ve reviewed, of a universal and unified housing bubble that touched nearly every continent at the same time at such a big magnitude. Let us take a trip around the world and see what other housing markets are doing.
Those in bust mode
Two countries with giant housing bubbles that are still in the bust phase are Ireland and Spain:
Home values in Spain are now down by 27 percent from their peak while in Ireland, housing values are down a stunning 55 percent. It looks like prices in Ireland might be hitting a bottom but in Spain, given that over half of their young are out of work, it might be hard to see this picking up anytime soon at least from domestic demand. Easy money, fast building, and inflated prices.
These are a couple of markets that are still deep in the doldrums. It is hard to see these turning around anytime soon but if they do, the Irish housing market is likely to come back first simply because it has fallen so dramatically and popped a couple of years before that of Spain making prices much more affordable to those living in the country.
Those leveling out and turning around
Believe it or not, the US overall has hit a trough:
US home values are now down about 29 percent from their peak and are up over 5 percent year-over-year. As we mentioned many times, in the vast majority of states purchasing a home in the US isn’t a bad move. Given the giant subsidies in mortgage interest deductions (not always utilized fully), cheap rates, and the ability to build equity it is a wise move if purchasing at a right price. This applied to a generation before us and applies to the market today. However, in some hot markets like in Southern California the typical buyer simply cannot compete with the all cash buying from investors. Someone in the industry mentioned to me that those that buy with FHA insured loans are taking the crumbs of what the investors don’t want which are typically not the best places. The deals are rarely going to the typical family looking to buy.
Yet this is not the case for the US overall. Housing markets in many places are very reasonable and ironically, many of those states are the states with little to no investor activity. California has had about 30 percent of all purchases being made by investors in the last few years (versus a rate around 10 percent or less being the case for more stable markets).
The above chart of the 20 City Case Shiller Index is a reflection of the aggregate, not regional areas that may exhibit more bubbly behavior (i.e., over bidding, emotional pleas to sellers, all cash buying, and high flipping rates).
Canada is one of those housing markets that simply keeps going up, although it is starting to show massive signs of frothiness. Any time I bring this up, I get a good amount of comments on how “it is different” up there (or how we are different down there). In the US, even prime areas took a hit and the overall US market is still down about 30 percent from the peak. Zero correction has hit Canada and a big part of their economy now relies on housing:
At the peak of our insane housing market, residential investment as part of GDP made up about 6 percent for our market. In Canada, it is now inching closer to 7 percent. The historical average in Canada has also been higher. But what about homes already built pushing prices up? We’re not the only people seeing this:
“(Canada) A severe economic shock, such as the kind that hit Japan in the early 1990s and California and Nevada in 2006, would have to knock Canadian housing prices down by 44% to cause securities linked to Canadian mortgages to lose the highest ratings assigned by Moody’s Investors Service.
Such a house price decline, were it to happen, would be driven primarily by the phenomenal upswing in Canadian home prices over the past decade, Moody’s said.
Canada joins Spain, as well as the United Kingdom and Australia, in the ratings agency’s assessment of countries where growth in housing prices over the past 10 years has driven their values away from sustainable market fundamentals and into “overheated” territory.”
Like the Endless Summer sagas, you can technically go around the world and chase housing bubbles into perpetuity!