Interesting chart from (of all places) McKinsey, circa October 2009:

“From 2000 through 2007, a remarkable run-up in global home prices occurred (see chart). But that trend has reversed abruptly. In 2008, the value of US residential real estate fell 10 percent; the global average fared only somewhat better, declining by almost 4 percent. We estimate that falling home prices erased more than $3.4 trillion of household wealth in 2008.”

The chart below reads to me as having regular cycles, oscillating within a range. But something happened in the early 2000s to have that range explode upwards.

(Please note the title is from McKinsey, I have long stated this was a credit bubble –not a housing bubble)

>


Source: McKinsey Quarterly

~~~

Question: How did Europe and Asia and Canada all have a simultaneous housing boom as big if not bigger than that of the US?

Were the Australians compelled to follow the CRA? Did Barney Frank influence the Belgians? Were the US GSEs effecting policy in the UK?

Or might some other factors — like ultra-low rates, excess leverage, demand for junk AAA-rated paper, misaligned incentives, and/or derivatives have been at play?

Discuss…

Category: Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

68 Responses to “A Global View of the Housing Bubble”

  1. The McKinsey authors added this huge understatement: “And because home prices are slow to correct, the current slide may persist for some time, which could depress global consumption.”

  2. ukarlewitz says:

    Hey, what do you mean, ‘of all places’…

  3. Liquidity Trader says:

    Those damn liberals at McKinsey!

  4. USSofA says:

    The chart certainly does add evidence to your argument that the CRA was not the sole cause of the housing bubble. I believe the CRA was partly to blame for the bubble but probably a minor part.

  5. BennyProfane says:

    To me the placement of Japan on that chart is fascinating. The poster child for modern real estate bubbles before 1999 is nuthin’ compared to the west today.

  6. nofoulsontheplayground says:

    The patterns in that chart suggest real housing prices around the globe will settle or bottom around 1996 prices by the 2016-2017 time frame. It also suggests an inflationary boom starting around the year 2023 and lasting to 2036.

    This lines up quite well with long term cycles.

  7. AHodge says:

    well you discussed pretty good for a para. look also at

    1 where they start— underval/ overval?
    2 esp for europe— where they boom because of new forex rate guarantee for the crappy countries and a euro based much lower mortgage rate, 4 country examples here
    3 low rates everywhere
    4 a learned behavior boom esp lenders

    hard to look at this and blame only the US Gummint– that hasnt stopped the cognitive denialists

  8. farfetched says:

    “I believe the CRA was partly to blame for the bubble but probably a minor part.”

    LOL! Barry, you nailed it. Cognitive dissonance does seem to be overwhelming for some. Even when faced with overwhelming evidence all some people do is mildly realign their broken narrative. What constitutes minor? 1/100 – 1/1000 – 1/10,000 – 1/1,000,000 – 1/10,000,000,000?

    How many people purchasing homes are in the countries on the chart? And how many of those “might” have been loaned money by CRA governed banks (ONE COUNTRY- ONE BANK) and then defaulted? And we wonder why the vast majority of traders and investors lose money? They simply refuse to use common sense and real data.

    Yes, the CRA played a minor part. Like so minor it’s likely un-measurably small.
    That’s like attributing cancer to that pimple you got when you were 13.

  9. Irwin Fletcher says:

    I wrote a paper on this back in 09. Dusted it off. Main causes of Housing Bubble.

    1. Chairman of the Federal Reserve: keeping rates artificially low and not allowing mortgage market to self-correct.
    2. Mortgage lenders: got more and more aggressive believing they could just outrun their delinquencies.
    3. Borrowers: overstated their income, bought houses they couldn’t afford or tried to flip properties.
    4. Mortgage Brokers: I wrote an entire page on this one. A major culprit, for lots of reasons.
    5. Wall Street: Packaged and sold the bonds baby, and wouldn’t know a good loan if it bit them in the butt.

    These are the top five, and its not only one of them, it is ALL of them. You cannot remove any of these five.
    If you do, you are not honest.
    The CRA had absolutely nothing to do with this. Anyone who says so is talking out of their ass.
    If I had to pick one of the above that had the biggest impact, it would have to be Number One, by a wide margin.

  10. Moss says:

    Those damm liberals is right! How dare they liberalize every known financial regulation and restriction since 1930 know to the Western Banking cartel!

  11. irvingia says:

    Whenever the Republican candidates and right wing talking heads blame the CRA for the housing collapse my head wants to explode. As Barry explains in Bailout Nation there was no requirement in the Community Reinvestment Act that required banks to lend to marginal borrowers, just encouragement to try to lend to weaker borrowers in areas where the banks opened branches.

    Further, most all sub-prime loans were not done by banks. They were done by “non-bank” lenders which were not covered by the CRA.

  12. arogersb says:

    More than CRA, the issue is subsidy to the cost of capital via Fannie and Freddie (or other mechanism). While in Europe there was no Fannie and Freddie, the Euro created a subsidy from low risk countries to higher risk countries such as Spain, Italy and Greece by lowering their borrowing cost. So the effect is the same. Because of the convexity of the money demand curve (which relates interest rate and quantity of money), such subsidies have a much higher effect when interests rates are low than when they are high.

    For an analysis on the causes of housing price increase I suggest a paper (The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis (Mian & Sufi 2008, University of Chicago) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1072304

    They analyze and test each hypothesis including the level of risk free rates (called the income base hypothesis).

    ~~~

    BR: I scanned that sometime ago, but if memory serves they reference a big growth in mortgage credit, the lows rates, and the securitization of subprime mortgages (duh X 3). That is consistent with my view that this was a credit bubble and not a housing bubble.

    They never really explained their “unique zip code level data”; nor do they address the even larger boom & bust overseas. But I will try to reread this paper over the next week.

  13. DeDude says:

    The common factor is an explosion in “funny” mortgage products and low interest loans, that had no connection to the actual risk of the loan. This allowed people to purchase more house than ever before, and drove a bubble. The reason you could detach the risk from availability of loans was that they found a way to hide the actual risk from the end purchasers of the loans. Furthermore, they found a way to insulate the people who could and should have known about the risks, from the consequences of the risk (yet those people still harvested the upside with little or no exposure to the downside). In most cases it was an adoption of the failed ideology of “markets can take care of themselves” that allowed these absurd situations to develop without regulators or politicians stopping them.

  14. beaufou says:

    Didn’t low interest rates also greatly help create the dot.com bubble?
    This is the only policy we now have, one bubble after the other for “growth”, maybe it is time we abandon this never ending growing-monetary beast and get a little more creative.

  15. budhak0n says:

    Ergo,viewing the facts in the light most favorable to the “plaintiff”, what’s the rule of law?

    Oh that’s right we flew right over that one as well.

    It goes deeper because technically then wouldn’t asset prices themselves be inflated with funny money? Not just housing? Think it through.

    That’s why when it comes to this issue I’ve effectively given up on the technical analysis. I don’t think it changes the outcome.

    On one hand we won’t to bemoan those who artificially inflated this bubble, which they did, and on the other we don’t want to face a day of reckoning, which everyone knows is long overdue. They’ve been calling for a final day of american reckoning for a long time now. It never seems to come.

  16. kevinmon says:

    “But something happened in the early 2000s to have that range explode upwards.”
    I am from Canada and there are a number of reasons why this happened here.

    - interest rates were lowered after the tech crash.
    - volatility in the stock market allowed for a “flight of money into real estate”
    - government encouraged home ownership with more subsidies for homeowners
    - lending standards were lowered
    - real estate fever spread throughout the world and this had a positive feedback loop until some countries households took on too much debt and crashed. Countries like Australia and Canada are next to fall.

    This post shows how total household debt has grown since 1971 with house prices in Canada.
    http://saskatoonhousingbubble.blogspot.com/2011/11/canadian-total-household-debt-with-some.html

    ~~~

    BR: Interesting issues — but they do raise additional questions:

    1. Stock market volatility was unusually low prior to the market bust (2003-07); what impact did that have?
    2. Government has encouraged home ownership for decades; why suddenly in 2002-07 was it so important?
    3. What subsidies for homeowners are you referring to? Tax deductions for mortgages or others?
    4. How does “Real estate fever” spread from Las Vegas & S. Florida to the rest of the world? Isnt all RE local?
    5. How can we explain the boom in commercial RE?

  17. scapescu says:

    Look at the placement of Germany on this chart. And now every Keynesian is criticizing this country for opposing the ECB to turn on the printing machine.
    Of course the source of the housing boom was the “ultra-low rates, excess leverage, demand for junk AAA-rated paper, misaligned incentives, and/or derivatives”. But which was the cause of all these? Only a very permissive banking legislation? Where did the money that were malinvested in the subprime crisis came from? When you have a central planning institution like the Fed ( which is only an extension of Wall Street)
    the predominant idea is that prosperity always come as a result of more money on the market; of course this money will enter the economy by the big banks; where this money will be spend will be decided by the intelligence and morality of these banks; and I think that all the time this money will be, more or less, malinvested creating periodically bubbles.
    New tougher regulation will be good for a while but finally the big banks and their appendix, the FED, will deregulate for the simple reason they have the big bucks to buy the regulators; and they have the big bucks for the simple reason they have the power to create it .

    ~~~

    BR: Germany has been in the process of absorbing East Germany for 2 decades now. That has been a timely and disruptive process.

    Japan similarly has had an awful housing market for 3 decades, following their 1989 bust

  18. jlj says:

    Perhaps the answer is something more esoteric. Is the reason for so many empty houses and commercial spaces a real estate bubble or the Rapture? Perhaps 2+billion people were taken away in the Rapture. & God in his infinite kindness took memories of them away from us and replaced their memories with the tailings of the financial crises. So sorry everyone, we are here for the duration :-)

  19. Renting in Mass says:

    I think the answer is clear. Barney Frank is more powerful than we can possibly imagine!

    We should start a new meme where we replace Chuck Norris in all those jokes with Barney Frank.

    Example: Barney Frank doesn’t sweat. He forces the air around him to cry and uses its tears to cool himself.

  20. crankitto11 says:

    Paul Krugman and Robin Wells put a theory around the Great North Atlantic Real Estate Bubble in this August, 2010 piece from the NY Review of Books: http://www.nybooks.com/articles/archives/2010/sep/30/slump-goes-why/?page=1

  21. gman says:

    @sapescu
    “And now every Keynesian is criticizing this country for opposing the ECB to turn on the printing machine.”

    I see this error all over the place. It is an error that anybody who passed macroeconomics 101 at any community college should NOT make.

    Keynesiansim should be used to mean countercyclical fiscal policy.

    ECB deals w/ monetary policy. People are waiting to see the ECB do what Friedman encouraged the Japanese central bank to do in the 90s…PRINT MONEY! Friedman/monetarists! Many neo-Keynesians also think that is the correct policy for the ECB.

    Fiscal policy is distinct from monetary policy! Keynes know for fiscal..Friedman for monetary.

  22. Renting in Mass says:

    This one is particularly appropriate:

    When the Boogeyman goes to sleep every night, he checks his closet for Barney Frank.

  23. beaufou says:

    “Look at the placement of Germany on this chart. And now every Keynesian is criticizing this country for opposing the ECB to turn on the printing machine.”

    Germany didn’t need to invest in the speculative real estate circus, the Euro had made German companies more competitive – they have practiced austerity for a while too with stagnant wages -.
    They had the luxury of using the money for productive use unlike their neighbors who had an overvalued Euro and lost their competitive edge. It was easier for PIIGS governments to reap a profit from real estate speculation.

  24. algernon says:

    For the last time, it isn’t that Fannie/Freddie/CRA had no effect. It is that the driver without which these bubbles would have been impossible was the credit bubble enabled by the central banks of the world.

    The blame is not totally with the Fed, tho’ their loose money policy forced the Asian & petro-state central banks to be even looser than they would have otherwise been in order to peg the US$. Significantly, PBoChina & others were promininently buying & cheapening long-term US & Euro debt, making mortgage rates irresistable.

  25. slowkarma says:

    I believe when you look at a list of major players in this debacle (such as the list provided by Irwin Fletcher, above), that any effort to blame a few of them and drop out others is a political exercise, not an analytical exercise.

    The key question is, what would have happened if X had not gone along? What if the GSEs had insisted on strict credit limits? What if the banks had? What if the rating agencies had insisted on examining the underlying credit worthiness of the mortgages they were bundling? A multi-trillion dollar bust is not done by conservatives, or liberals, or “the fed.” Everybody helped bake this cake. But I do come back to the fact that one organization, the Congress, could have effectively said “no,” and that there were members of Congress who saw and spoke about the coming disaster before it got here…and nothing was done.

    And I also keep asking myself what I would have done if I’d been some broken-ass ex-used car dealer living in a San Bernardino trailer who figured, “Listen, Slow, you can either step aside, because that’s the right thing to do, or you can stay right in here and make $500 million and move to Malibu before the music stops….”

    By the way, real estate certainly isn’t all local, and I think you could make a pretty good argument that the most over-heated areas were the least local — I mean, the London housing prices aren’t being driven by the former inn-keepers moving in from Shropshire. And neither were the prices in New York, Miami, Vegas or LA…

  26. scapescu says:

    @gman

    In the “The General Theory of Employment, Interest and Money” the business cycle is stabilized by central bank’s monetary policy and government’s fiscal policy. When I use the the term Keynesian I mainly refer to this book written by J.M Keynes and not to “macroeconomics 101″. By the way, it’s a revolutionary idea that “Keynesiansim should be used to mean countercyclical fiscal policy” only and not monetary counter cyclical policies also which will go to Friedman.

  27. beaufou says:

    “PBoChina & others were promininently buying & cheapening long-term US & Euro debt, making mortgage rates irresistable.”

    The debt thing is a consequence of the crisis, not a cause.

  28. covel says:

    The something that happened…is discussed here: http://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of_Crowds. Kinda cool that someone had the answers for today figured out as far back as 1841.

  29. scapescu says:

    @BR
    Let’s suppose counter factually that Germany wouldn’t have had the pain of integrating East Germany; do you think they will be now up in that chart? Isn’t there a different monetary philosophy?
    What about Switzerland? Nothing stopped them to print more money to bring more prosperity ( at least until a couple of weeks ago).

  30. gman says:

    scapescu@

    By your understanding, Friedman would be a Keynesian..which would be news Friedman.

  31. WaveCatcher says:

    (Abudant + Loose) Credit is to blame.

    CRA helped the poorly qualified access the abundant credit.

  32. scapescu says:

    @gman
    Nice! Try to read this: ‘Keynes on monetary policy,1910-1946″ by D.E Moggridge and Susan Howson, Oxford Economic Papers. I don’t know if you could find it online, I didn’t search for it.

  33. zell says:

    New international Guiness World Record competition: How many people can swim in a punch bowl?

  34. Ned Bushong says:

    Here’s the best explanation: http://www.youtube.com/watch?v=sbClaP08kB8

  35. RW says:

    @WaveCatcher, abundant and loose credit was certainly a large contributing factor but the statement that “CRA helped the poorly qualified access the abundant credit” is simply false.

    CRA helped the poor and minorities qualify (not the “poorly qualified”) for and receive credit at better than the sub-prime rates they were typically offered if they provided documentation they could make the payments.

    Private lenders not governed by CRA made loans that required no documentation of ability to pay, the so called NINJA loans, but no lender governed by CRA could do that nor is there any evidence they did; e.g., mortgage-backed securities with a higher percentage of CRA loans in them had lower default rates than average.

  36. judyvbezaz@hotmail.com says:

    The chart to me says that there was a global glut of capital, a fluid international capital market allowing investors to chase higher yields, and a global regulatory system (with US the biggest player) not up to snuff.

  37. ami_in_deutschland says:

    Since I just bought a Haus in Germany this past year, I really wouldn’t mind a bubble finally getting around to this part of the world. (Though, considering all the work put into renovating it, there’s no way I’d consider selling it any time soon.)

  38. formerlawyer says:

    Barry,

    What role does demographics play? I can see the baby-boomers moving into real estate in the late 70′s and early 80′s. The recession of the late 80′s (that is losing one’s job) would put a damper on real estate. The pent up demand of baby-boomers for their next home larger home, the echo baby’s first home and the retreat by central banks from their inflation fears – i.e. lower interest rates would appear to drive the rise in real estate through the latter part of the 90′s. Finally, the continued low interest rates coupled with the traditional “strength” of real estate (as most households largest assets) would see further investment, flipping, McMansions etc. until the mid-2000′s. When the baby-boomers began unloading their large homes into an overloaded market in the mid 2000′s there were no buyers and a consequent housing crash.

    I have no information to support this narrative. Whether it is plausible or not would require further research. In terms of policy consequences – this narrative would suggest that these countries, almost all of which (except for the U.S.A). have a negative replacement rate for their native populations need to look towards immigration policy changes. Further, the greying of the existing population would mandate consideration be given to ensuring the next generation would obtain the best paying jobs to support the coming crushing medical and pension costs.

    Exactly what the US is not doing.

  39. Jim67545 says:

    Irwin Fletcher nailed it above. Brings in ALL the principal players.
    Formerlawyer brings in the demographic influence in Irwin Fletcher’s #3 – the role of borrowers. I wonder what influence a general feeling of prosperity encouraged people to buy homes or upgrade to larger or newer homes. What was the consumer sentiment during these periods – in USA and elsewhere? Is it a case of “irrational exuberance?” People must have felt financially secure, or financially desperate (hoping to make a killing flipping), to make these investments.
    What influence is there with baby boomers approaching their peak earning years and falling behind (in terms of savings) in preparing for looming retirement.
    This brings us to the question: did loose lending standards (+ low rates) cause, or respond to, the demand or was it a cooperative situation?
    I like Irwin Fletcher’s characterization of lenders “running ahead of delinquencies.” Having somewhat been there, I think he has it exactly right.

  40. victor says:

    Wow! look at Germany. She escaped the bust and didn’t participate in the boom. If you bought your house in Germany or just across the border (what border? you dont even stop) in Holland, Belgium or France only a few years ago, even after the bust you’d be worse off in Germany.

  41. Bill Wilson says:

    There’s probably a Barney Frank and a George W. Bush in every country.

    That’s a symptom that every credit bubble has in common. People who say stupid things, do stupid things, and believe stupid things.

    ~~~

    BR: I suspect the Europeans would prefer you did not project American Exceptionalism into their part of the world!

  42. boveri says:

    I love this Ritholzism — “Did Barney Frank influence the Belgians?” Oh sure, Barney Frank is responsible for the whole thing worldwide and let’s not forget Dodd!

  43. brokrbob1 says:

    One factor I rarely see mentioned is the systemic mispricing of risk in mortgage lending that gradually took hold in the boom years away from the GSEs. When the LTC crisis nearly wiped out the subprime industry in ’98, Ameriquest (the lone SP survivor) took over the market and priced the risk of subprime accurately. The terms of their mortgages were horrendous to the (mostly refi) subprime borrower, but the buildup in equity since the Resolution Trust days gave them plenty of room to gouge deadbeat homeowners who had no where else to turn for their big-screen TV. When prime rates were 7% costing 1 point, Ameriquest was charging 12% costing 5 points and with a 5 year pre-payment penalty (on a 2 year ARM!) Now that’s some effective risk pricing. By 2003 Ameriquest was rumored (being privately held, they never reported official numbers) to be the largest mortgage lender in the country.

    It’s also a yawning gap (twixt prime and Ameriquest) that proved big enough to attract a boat-load of competition, and before long everybody was buying market share. In the good old days (the ’90s), when a prime lender wanted to fill its pipeline of loans, all it had to do was nudge the rates down a bit below market and viola, full pipeline. As more and more lenders crowded into the Alt-A and subprime space, the pipelines pulled rates and underwriting standards ever lower in a massive negative feed-back loop. Now these lenders were providing purchase loans that drove real estate prices to absurd levels (you’re right Barry, it was a credit bubble), delaying the day of reckoning and preventing a healthy and much-needed correction. Note that the most egregious excesses came long after the Fed had abandoned its low-rate policy. The CRA and GREs had little to do with these forces – I worked in Lehman’s mortgage division at the time, and we didn’t much care what Fannie and Freddie were doing. We had our eyes on Countrywide and Bear Stearns.

    (By the top in 2006, their were so many Alt-A and subprime players competing on price and underwriting terms that prime borrowers were offered rates at or below what Fannie and Freddie were charging. Why bother proving your income when there was no incentive to do so? )

    So you got a classic case of the mispricing of underwriting risk that Buffet has been explaining in his annual letters for decades regarding the insurance business – after a few years of below-average underwriting losses, most insurance providers act like drunken sailors on shore leave, even though they’ve been through the bad times themselves. The new mortgage lenders had never seen bad times, and priced themselves right into the ground. Granted, the pricing mistakes were turbo-charge compounded by the excesses mentioned above (Fed, Congress, securitization) but even without those factors the industry was headed for a monstrous crash.

    ~~~

    BR: Nice comments. To give you an idea of how many companies popped up in the 2000s, see how many went bust during the crash: I use the Mortgage Lender Implode-O-Meter

  44. louis says:

    Main causes of Housing Bubble.

    1. Capitalism
    2. Chairman of the Federal Reserve:Puppet for Capitalism.

  45. Onthemoney says:

    FormerLawyer above hit the nail on the head – the missing and critical link in the argument is demographics.

    Americans did not own the baby boom, it was a post-war phenomenon which played out across the developed world. British, European and Aussie boomers were just as plentiful and were the source of tremendous demand as they moved into their most productive (and reproductive) years during the 90s and early 2000s. Everyone focuses on the financial sector as the source of our real estate woes, and yes, these guys were the suppliers – the pushers if you like.

    But they didn’t conjure up the basic demand. That came from us. Millions of men and women moving through our natural life-cycle, looking to upsize, expand & build, re-fi, re-decorate, second-home, etc. according to the needs and demands of growing family life. Speculation, from all corners, came as an nasty outgrowth of that.

    CRE boomed on the back of the expanding economy – again, founded on the incessant rise in consumer spending created by huge numbers of boomers. An explosion in credit, engineered by Greenspan et al as BR has so clearly described, was what led to the late-stage bubble and excess.

    Japan had its huge baby boom twenty years before our own, and had a property bonanza aided ultimately by an epic credit expansion. Their subsequent real estate meltdown brutally reflects not just a credit bust, but a baby bust. Now that’s what we’re all going through.

  46. gman says:

    scapescu@

    I have read Keynes and Friedman. I think Friedman himself would strongly disagree w/ your description of of his policy prescription as “Keynesian”!

  47. gman says:

    scapescu@

    I guess I have just never thought of “monetarism” as just rehashed Keynes. I guess I also just hang w/ too many U of C people who have oversold themselves.

  48. EMichael says:

    One would think that understanding that loans made by CRA banks in CRA areas reached their height in 1994 and steadily decreased right through the bubble would convince even the most stubborn ideologue to look elsewhere.

    http://www.jchs.harvard.edu/publications/governmentprograms/n08-2_park.pdf

    But like the 40% loss of market share of the GSEs during the bubble, the almost equal market share loss of CRA banks means nothing. Instead, we have to listen to people talking about a bubble caused by banks that were losing business, and in the case of CRA banks, steadily losing business over a ten year period.

    In my opinion there are only two ways to deal with Cognitive Dissidents; Prozac or a baseball bat. One they have to administer themselves, one I would be happy to administer(particularly to the CRA DID IT! group).

  49. 873450 says:

    Literally and figuratively, “junk AAA-rated paper” spawned synthetic junk AAA-rated paper.

    Nothing tops payouts realized from winning bets on impending default of AAA-rated junk you bundled together and sold to clients.

  50. Moss says:

    Looks like Newt the Grinch is a big liar.

    Historian my arse, a lobbyist is more like it.

    http://www.bloomberg.com/news/2011-11-15/gingrich-said-to-be-paid-by-freddie-mac-to-win-republican-allies.html

  51. Hugh says:

    Question: How did Europe and Asia and Canada all have a simultaneous housing boom as big if not bigger than that of the US?

    Answer: For Europe – the introduction of the Euro brought artificially low interest rates to many European countries (Ireland, Spain, Italy, Greece). This blew up our own housing bubble.

    I would imagine that exploding house prices in both Europe and the US encouraged speculation in both Asia and Australasia: often the big property developers are global players.

  52. Expat says:

    I have spent the last three years puzzling over the French market. I bought (under duress but a Higher Authority insisted) in cash so I don’t really care that much where my price goes, but I can’t understand the generalized bubble here.

    Most French stick to “it’s different here because Frenchmen never move, never sell, etc.”. The banks claim they stuck to the same principles throughout: means testing, one-third of income, etc. Of course, they extended mortgages from the usual twenty out to thirty years. And many people claim that French prices were severely depressed so the percentage comparisons are meaningless.

    I think the French bubble is the result of the world-wide credit bubble, low rates, and the illusion of growth. It is sustained by social safety nets, feeble accounting, and a legal system that makes kicking people out onerous and time-consuming. Beyond that, I don’t really understand why France hasn’t collapsed.

    If anyone has stats on French house price to income, I would be happy to read about it.

  53. beaufou says:

    “Answer: For Europe – the introduction of the Euro brought artificially low interest rates to many European countries (Ireland, Spain, Italy, Greece). This blew up our own housing bubble. ”

    Exactly, the rates were too low for the PIIGS and too high for Germany, hence no bubble there.

  54. lalaland says:

    Isn’t the common thread the explosion of the shadow banking system?

    Isn’t that why the UK had the biggest bubble of them all (since the UK was the hub of the European shadow banking world; the wealth of financiers created the property bubble in London)? The banks levered up on everything they could: Irish, Portuguese and Spanish property, sovereign debt, currency swaps (right Greece?), CDO’s, SIV’s etc?

    I don’t think we had a credit bubble even, I think we had a banking bubble and like any parasitic system it undermined the health of the host.

  55. [...] we took a global view of the Housing boom & bust; Today, we take a somewhat wonkier view of Home construction’s contribution to Employment [...]

  56. victor says:

    Recap on Germany no boom, no bust because: East Germany drag, higher rates in euro’s, undervalued euro relative to old DM, tighter credit/lending practices and what else? That such a large economy didn’t go thru this boom/bust “cycle” is remarkable. Any more reasons? Japan we know, quasi depression period. Switzerland? they’re always different. Sweden? after their 90′s financial crisis, chastised? Again, can someone recap how Germany “did it”?

  57. beaufou says:

    “If anyone has stats on French house price to income, I would be happy to read about it.”

    Here’s one since 1965
    http://www.immo-one.fr/blog/wp-content/uploads/2011/09/prix-logements-depuis-1965.jpg
    House prices represent about 70% of household income, driven higher by prices in Ile de France (Paris)

    This one is very interesting, this the house prices versus rents:
    http://nibearnibull.blogspot.com/2011/07/immobilier-ou-vas-t-on-un-graphe-suffit.html

    I think one is gonna have to give.

    As for collapsing, the savings rate in France has held pretty steady, while French banks have been highly speculative, French citizens have stayed away from Credit Cards and other fancy self-indebting devices.

  58. beaufou says:

    Sorry I inverted the links, the first one shows the house price/family income index (70% as I said) and the blue line represents renting prices.

  59. Expat says:

    @ Beaufou: merci pour l’info. While I agree that French consumer debt (mortgages and consumer debt) has not run wild, I don’t understand the mechanism which are allowing the real estate bubble to stay inflated. According to nibearnibull, the market is massively overvalued (five times income instead of the long-term three times income), so why is it holding up so well? Is it interest rates alone? So when (if ) rates return to 7% and up, house prices will collapse?

    Of course, most people I talk to here (or in the US) don’t understand that final point. They think it’s great to buy with low rates…au contraire!

  60. beaufou says:

    I am surprised as to why prices remain so high, I think personally that a 30% drop is in the books (wishful thinking maybe, if renting goes up instead, it would be devastating).
    The only reasons I can think of are…many retirees from Europe and elsewhere are still looking to buy and move to France and the summer season is very active in that department, due to high demand in the south most notably.
    There are not many sub-prime loans in France, defaults are rare, some argue there’s no bubble, I disagree.

  61. eurostoxx says:

    old chart… house prices in the World exUS, Spain Ireland are up big time since then. Asia, Canada, Auz, LatAm, Russia

    how about one with house price / median income

    house prices all driven by flow, marginal buyers who base thier values on recent transaction (total momo market)

    house prices will go up, until they dont ….

    fiat money at its best

  62. croatian says:

    It’s globalization. It’s accumulation of FX reserves. Now there are two forces. First – globalization, outsourcing, huge inflow of new labour that pushes prices down, causes low inflation, high capital inflow and high current account deficitis in importing countries. Those are market forces. And there is government intervention. I’m not talking about FED and Congress but about chinese communist party and chinese central bank ( and all other central banks that build up huge reserves – oil exporters, russians) which economic policies were all about exports and savings. Without them it would be different. Yuan would go up, chinese wages and spending would go up, savings would be lower, capital inflow in US wouldn’t be so big, interest rates wouldn’t be so low. No housing bubble in US.
    I suppose forming housing bubble in Europe was more of ECB story. One monetary policy for totally different economies.
    Maybe there is a way to connect those two stories.

  63. Bill Wilson says:

    When the great recession first hit Europe, I can remember European leaders blaming their economic problems on the mortgage excesses in the United States.

    They would have been happy to blame their problems on Barney Frank, Fannie and Freddy. It’s better than admitting that you got caught up in the same bubble.

  64. ElSid says:

    Uh…below is a comment I posted here on the first “Bloomberg/Big Lie” story. Couldn’t help but think that my stuff looks similar to some of the above. At least I finally get to see an intelligent person using this argument now, but it wasn’t in the “Big Lie” story, even if this is the obvious short-winded way of ending this entire bogus conversation about Fannie and Freddie:

    ElSid Says:
    November 5th, 2011 at 9:56 pm

    My simple retort to this GSEs-and-Congrees-did-it claim, which unbelievably I hardly ever see used is:

    “Then what caused the housing bubble in Ireland? Fannie Mae caused that? Liberal U.S. Congressional reps? What about the housing bubble in Spain? Or the current one in China? Or England?”

    Conversation ends right there. There is no other explanation needed and they *never* have an answer for it.

    I don’t see that above either.

  65. arcticpup says:

    I read that Germany’s RE market didn’t have the big up for 2 reasons:
    (a) Germany has lending standards that require 40% down. Apparently, this is very much regulated and there are watchdogs that do prosecute lenders that break the rules.
    (b) Germany residents never bought into the American dream of home ownership. Home ownership is only about 50%.
    So it’s likely those would be deadbeat hand back in the key “owners” that might have issues paying the mortgage never ever got around to saving that downpayment to put them into a house. Hence the demand wasn’t there and their was the perfect suitable alternative rental market which was sufficient to provide shelter to millions of residents that had no business in buying a home.

  66. arcticpup says:

    Actually… it’s 20% down according to this article…
    but… the scoop as to why Germany didn’t have the crash is because there are rules. And there were steep taxes to discourage and prevent flipping houses as well…

    http://www.guardian.co.uk/money/2011/mar/19/brits-buy-germans-rent

  67. [...] post over at The Big Picture. See especially the graph of the the increase in housing prices in OECD countries. I think it [...]