The world catches the housing bubble flu... Ha-choo!
Evidence is mounting that the global property cycle is turning down, as rising interest rates and heightened inflationary pressures combine to put the brakes on demand for real estate, according to a Morgan Stanley report.
"Innovations in the global financial system have led to a rising correlation of property markets to each other and central bank-policies. It has essentially turned deflationary shocks of the past 10 years into a global property bubble," Xie said.
He cites some telling statistics to illustrate his point.
The value of U.S. housing has risen to 173% of gross domestic in 2005 from 135% in 2000. And in Australia, housing values rose to 347% of GDP in 2005 from 271% in 2000.
Western consumers, who've supported their consumption binge through home-equity refinancing instead of wage gains, would have little choice but to rein in spending if home prices decline. As consumers retrench, corporate earnings will decline, sending the equity market lower.
"As the global economy is likely to experience rising inflation and cooling demand, all assets are likely to depreciated," Xie said.
July 06, 2006
Growing evidence of real-estate 'bust', global property cycle turning down
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14 comments:
I don't have a link, but recall one Greenspan's responce regarding housing bubble.
When he was asked about danger of housing bubble pop, he sad that government (read FED) can inflate another bubble. Yes, folks, we're in a bubble economy.
There is one interesting fact about amount of US$ in the world. Ready?
There are about 400 TRILLION DOLLARS Total in all financial instruments (cash, stocks, bonds, derivatives, etc. etc), but only about 80 Trillions in real thing (Real estate, posessions, etc.)
This five-fold gap is unstable in a long run. In the panic time when all this virtual 400 Trillins start chasing real things two scenarios is possible. One is 80% reduction of stock markets, bond market default. The other one is hyperinflation (prices will rise 4-5 times). Again it's not simple multiplication of pricetag everywhere. Some prices will rise dozen times (commodities), the other will stagnate.
I believe that mixed scenario will unfold (huge drop in stocks, some bonds will default, and 200-300% inflation).
FEDs will fight back lowering the interest rate, but it won't work. In case of panic "bank, stock, bond holidays" will be common actions. International transaction will be suspended too (to prevent foreign banks flud the domestic market with worthless green paper.
Back to bubble economy. It wishful thinking to rely on housing collapse.
It's better to be prepared for hyperinflation
When the city gets a cold the country gets the flu.
I agree with you on hyperinflation. I do think that all those dollars will run into gold and real estate. But, all those dollars are held in over seas banks. A lot of those dollars will try to run into real estate here.
I think that the opposition to the ports deal was the first shot at closing off our markets. I think the boarder issue is another part of us closing off to the world.
I think the powers at be are going to use the out political system to close out most of the world when the crash comes.
All of the things happening now are just setting the stag.
The winner gets to write the history book.
It's different this time...
Keith there was an excellent interview in the Wednesday Wall Street Journal with Ken Heebner preticting a 50% decline in prices in areas like Phoenix. It was below the fold on R1 "The Journal Report" 7/5 "Surviving a real estate slowdown" "A loud pop is coming..." By Gregory Zuckerman.
Excerpts from the WSJ interview with Ken Heebner:
WSJ: How is the housing market?
KH: A significant decline in prices is coming. A huge buildup of inventories is taking place, and then we're going to see a major retrenchment in hot markets like California, Arizona, Florida, and up the East Coast. These markets could fall 50% from their peaks.
Article talks about risky mortgages, inventories, people underwater and walking away from homes, etc.
dan see my post on this article a few threads down
Ecobuilder makes an excellent point about a potential future event predicted by Swantar the transcendental macroeconomist. Swantar points out that rising interest rates being implemented by the BOJ could initiate an unwinding of the multitrillion dollar carry trade, slightly out of phase with the declining real estate asset demand, and causing a massive de novo supply of new "paper" cash (from heretofore virtual or electronic cash) out of derivative-account liquidations and moving into real estate assets like some credit tsunami. RE and precious metals would see spectactular, seemingly paradoxical, price increases in a high interest rate environment, as these assets are viewed as shelters from monetary hyperinflation. This theoretical phenomenom is unprecedented and has been termed a Swantarian Conundrum.
"When the city gets a cold the country gets the flu."
Maybe not. In the German hyperinflation of the '20s, farmers were isolated from the economic woes faced by city dwellers. In fact, when farmers refused to sell their produce at prices fixed by the government, they were targeted with anti hoarding laws.
People in modern-day suburbia who couldn't live off the land are not be in that position and would be affected by problems in cities, but true rural folk, farmers and ranchers, could get along for years without the city's "help".
Anonymous said...
"When the city gets a cold the country gets the flu."
In the last bubble I was living 1 1/2 hour from Los Angeles. There were no jobs and the cost of living was high. The opportunity that could afford my expense was in the big city. The government in an effort to balance the budget closed the local Air Force base and put a nail in the coffin. My house went from 200 to 100 K overnight. Three months later homes like mine were selling for 30K at HUD auction. My neighbors on both sides waked from their houses into better ones at half the price before they went into foreclosure. I do think it will be different this time but not better. It is a slow and painful process to raise wages to afford the new world prices. We have already ordered and consumed the goods, now we await the invoice.
50% decline in prices in areas like Phoenix.
A recent News 12 story mentioned that 7 out of 10 people in Arizona can qualify for the IRS electronic FREE filing on the web. In order to qualify you MUST make under 50K a year.
So what the Wall Street Journal is saying is quite accurate. How the hell can a city/state with a income range like that sustain home prices at the current level?? It can't . Wages are going nowhere. Something has to give. And it WILL be home prices. They must and will come down at least 30% but 50% is not unlikely at all.
With the loose lending standards in place the past few years , even a little chimp in diapers jumping up and down screaming for a banana could have gotten the keys to a brand new home.LOL
Anon 8:51-
Lordy those are some pretty impressive price drops (220K- 30K in a few months).
Maybe I'll be able to get that great 550K house for 150K cash by Christmas afterall!
Thanks for sharing!
"My neighbors on both sides waked from their houses into better ones at half the price before they went into foreclosure"
This seems a bit specious(w?)
If they are your neighbors, wouldn't they also have been hammered by the base closing, and thusly not easily selling one house to buy another?
Just sayin'
OTW - Sorry you had to go through that. Losing money has got to be worse than never having had it. I am convinced.
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