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Global Real Estate Bust?

Posted By Barry Ritholtz On June 5, 2004 @ 6:50 am In Finance | Comments Disabled


Interesting discussion at the Economist [1] on which countries are particularly vulnerable to their residential-property boom turning to a bust:

“Our indicators, based on data from estate agents, lenders and official sources, show that house prices are slowing in several economies that had been looking frothy. In America average house prices rose by only 1% in the first quarter of this year, the smallest quarterly increase for six years. Prices fell in 39 of the 220 metropolitan areas covered. Even so, prices were still 7.7% higher than a year before. California saw the biggest gains, with prices up by 18% in Los Angeles. But higher mortgage rates may be starting to bite: new home sales fell by 12% in April, the biggest drop for ten years . . .

The drop in house prices in Australian cities undermines a popular argument heard in Britain and America that even if house prices do look frothy, they are unlikely to fall unless there is a big rise in interest rates or a jump in unemployment. Neither has been needed in Australia. Interest rates have risen by only half a percentage point during the past year, to 5.25%—less than half the level during the previous housing downturn in 1990. Meanwhile, unemployment is close to a 20-year low.

Australia is the first country to experience a big drop? (I would have never guessed that).


House prices have outpaced inflation everywhere in recent years — except Germany and Japan, where prices continue to fall.

Where have prices gained the most? Real Estate prices are now at record levels — in relation to average wages and rents — in America, Australia, Britain, Ireland, the Netherlands, New Zealand and Spain. Since homes are paid for by family take home wages, its important to consider the relative salaries and taxes of home buyers:

“The ratios of prices to incomes exceed their averages in the past 30 years by between 25% and 60%. A return to the long-term average could be brought about either by a fall in house prices or by a rise in wages and rents. The snag is that with wages in most countries increasing by only 3-4% a year, it would take years for inflation to erode real house prices to normal levels.”

Assume a reversion to historical mean of home prices versus incomes, and you can reach only one of two conclusions: Either we are all about to get a big fat raise, or real estate is due for a very significant correction . . .

Global house prices: Hair-raising [1]
The Economist, June 3rd 2004


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[1] Economist: http://www.economist.com/finance/displayStory.cfm?story_id=2736477

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