7/31/2012 8:03 PM ET|
US housing mess: It's not the worst
You've heard that all real estate is local, but the bubble has been global -- though certainly not uniform. Take a look at how other countries have fared.
Every month, it seems, you hear about a real-estate bubble bursting somewhere in the world. Americans are in year six of the U.S. meltdown, long enough to make us curious: Are these others like ours? Or different? Is it all one big epidemic?
It's not particularly comforting to know that economists are asking the same questions. "People already are doing research on it. We'll be arguing about it for the next 10 years," says Stephen Malpezzi, a professor of real estate and urban land economics at the University of Wisconsin-Madison.
To learn more, we asked experts to compare the U.S. housing fiasco with those in Ireland, Spain, China, Australia and Brazil.
What makes a bubble?
The more-or-less simultaneous rise of bubbles in many countries is unprecedented. Previous bubbles tended to be local and isolated. Oil wealth in Texas, for example, or a shortage of buildable land in San Francisco might drive prices ridiculously high, particularly if the local economy was booming. But other cities stayed untouched.
Now, instantaneous communication, easy travel and interconnected global financial systems can make national or even global property markets feel local to investors looking to make a buck, says Robert Shiller, a professor of economics at Yale University. He warned early of a possible U.S. real-estate bust in his 2000 best-seller, "Irrational Exuberance."
As property markets from Phoenix to Majorca, Spain, heated up, not only resident homeowners but investors everywhere jumped in. "I think of a bubble as a social epidemic of sorts," Shiller said in a recent phone interview. "It spreads like a disease. Enthusiasm goes from one person to another."
In reality, though, real-estate assets aren't mobile. They're fixed in one location.
For a healthy economy, you can't have more houses than people to live in them. There's no hard-and-fast definition of a bubble, but telltale signs include:
- Home prices that grow out of proportion to incomes. (Sustainable home prices are three to four and a half times buyers' incomes. Bubbles prices run seven or eight times greater than incomes, or more.)
- Rents that skyrocket compared with incomes.
- Home prices that soar while costs for land and materials remain flat.
Buyers also hold nonsensical expectations that prices will keep rising more or less forever. A hot market becomes a bubble when people buy even if they can't afford it, and their purchases have no financial justification. Bubble buyers panic that they might lose out, Shiller says.
Similar but different
Access to cheap credit by developers and consumers is a common theme among contemporary bubbles. From rents, sales, mortgages and construction to furnishings, home improvements and consumer spending of equity, housing adds up to about 20% of the gross domestic product in developed countries.
Experts point to governments' cracklike addiction to pumping up economic growth by stimulating housing markets. Largely that's done by keeping interest rates low.
In most recent bubbles, banks lent cheaply and often irresponsibly. "Credit was not priced according to the risk at all," says Marja Hoek-Smit, the director of the International Housing Finance Program of the University of Pennsylvania's Wharton School.
Yet despite the similarities, the causes of bubbles vary. Here's a look at the timing, gains and losses for five nations' housing bubbles:
|Bubble began||Prices peaked||Total gain*||Loss from peak**|
|Australia||Q4 1990||Q4 2010||153%||7%|
|China||February 2006||May 2012||42%||9%|
|Ireland||Q3 1994||Q2 2007||213%||30%|
|Spain||Q4 1994||Q1 2007||125%||27%|
|United States||Q1 1993||Q4 2006||52%||28%|
|Source: Global Property Guide |
*Prices adjusted for inflation / **As of June 2012
Looking at Australia
Home prices rose quickly in Australia during the 1990s. By the early 2000s, bubbles in Ireland, Spain, China and the United States had been launched, according to Global Property Guide, an international real-estate research site.
About 65% of Australians own homes, as in the U.S. But where cheap credit, speculation and easy construction loans inflated the U.S. bubble, Australia's housing market was fueled by too many buyers competing for too few homes, says Michael Lea, the director of the Corky McMillin Center for Real Estate at San Diego State University.
Aussies are mostly bunched up in six coastal cities with limited room for building, so the growing population creates a great demand for homes. Not everyone agrees that Australia's boom was a bubble. Home prices, as in the U.S., grew out of proportion to incomes but not as much as in, say, China or Spain.
Australian home prices hit a peak in late 2010. They've been falling gently, by 1% or 2% a quarter, like the current rates of decline in the U.S. but unlike the sickening quarterly plunges of 2% to 3% we endured in 2008.
The Australian government should get credit, Lea says. "The one country that acted proactively and pierced the bubble was Australia. In 2003 or 2004, they saw prices were too high, and they raised interest rates and headed it off."
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I have too much gray hair. I heard that 2-2.5 times your income (excluding your wife) with 20% down was the standard. I was always told to look at taxes, utilities and maintenance for this reasoning. Remember you will fill extra rooms. And include the possibility for job volatility. 3-4.5?
Lesser house - the more you can enjoy – Greater house – the more your ego can enjoy. This is true even if inflation hits hard and eliminates your mortgage.
"People already are doing research on it. We'll be arguing about it for the next 10 years," ......Who cares. I lost my dream home in 2010. I've never sat and argued about it. I moved on and i'm rebuilding my financial life again, even in my mid 50's. I don't care how it compares to the rest of the world.
It's like arguing over the price of Gas. Nothing ever changes. Who cares. Pay for it and move on already.
WE, IN GENERAL ARE RIGHT WHERE THEY WANTED US TO BE. WORKING MIDDLE CLASS WITH MEDIOCRE CREDIT RATINGS . WITH BANK OF AMERICA HOLDING BACK AID THEY ARE LEGALLY BONDED TO DISTRIBUTE FOR LOAN FRAUD AND OTHER SUCH SECURITIES VIOLATIONS,FORECLOSING ON HIGH DOLLAR HIGH APPEAL PROPERTIES AT WILL AND DRAGGING HOME OWNERS THROUGH MONTHS OR IN MY CASE YEARS OF MYSTERIOUSLY MYSTIFIYING PAPERWORK THAT I HAVE TO RESUBMITT EVERY 10 TO 20 DAYS ....YEAH THEN TACK ON THE NEW STUDENT LOAN SYSTEM,THE IRS AND NOW THE STATES TAXS MUST GO UP...YEAH I THINK THEY ARE RIGHT SHOULD BE A GREAT MARKET FOR FORECLOSURES ...
UNEMPLOYEMENT , SUICIDE....FINANCIALLY OF COURSE.
William Hinkley, Please back up your preposterous statement by showing us the part of the law that required this. Not just the CRA. Show us the actual language in the legislation you are referring to. BTW, the Community Reinvestment Act (CRA) concerned red-lining and involved a few of the largest banks. It never applied to any mortgage lending company.
Its sad how both partisan Democrats and partisan Republicans fail to acknowledge their own party's failures. To vote Democrat or Republican is to be a willing participant in the destruction of this country. Those two traitorous parties (and the elite businessmen who support them, whether Cons like Koch and Adelson or Libs like Immelt and Soros) are every bit domestic enemies of the American people as al Qaida terrorists are foreign enemies.
The only hope for this country is to vote BOTH parties out of office in favor of independents and 3rd parties, impose tarrifs on foreign goods (until foreign workers have higher wages), and get money out of politics by only allowing public financing of campaigns.
I close with a quote from Cicero:
“A nation can survive its fools, and even the ambitious. But it cannot survive treason from within. An enemy at the gates is less formidable, for he is known and carries his banner openly. But the traitor moves amongst those within the gate freely, his sly whispers rustling through all the alleys, heard in the very halls of government itself. For the traitor appears not a traitor; he speaks in accents familiar to his victims, and he wears their face and their arguments, he appeals to the baseness that lies deep in the hearts of all men. He rots the soul of a nation, he works secretly and unknown in the night to undermine the pillars of the city, he infects the body politic so that it can no longer resist. A murderer is less to fear. The traitor is the plague.”
luna1027 where were you when in 2008 when the lies were being reported. I was in Iraq. This administration has contained the country for the last three and half years from dropping so far off the map and becoming a third world country. The last adminstration in their last year, robbed American for every penny they could get their hands. So be careful what you asked for. Remember, if someone robs you for 8 years, it wil take more than 4 years to get back on track. How soon we forget!
Marilyn, you’re a risk. You are saying that house prices follow area wages and not the number of bedrooms. You are actually calling it a bubble and not expecting to recover. Next you are going to be saying that houses do not appreciate but follow inflation and wages. And in reality, they depreciate. I have been saying this for a good number of years since the peak and have been called sacrilegious. But house prices at 3 - 4½ should be called extreme. I will never be a real estate agent.
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