The Global ‘Party Of Irrational Exuberance Is Over’
An update on the global housing bubble. “Britain’s housing market showed the first signs of renewed weakness last month with an easing in demand for home loans, according to figures out yesterday. City analysts said the unexpected dip in mortgage lending suggested that property was becoming too expensive for many buyers and that activity in the market was starting to suffer as a result.”
“Signs of a sharp downturn are emerging in Shanghai’s once-sizzling property market with prices slumping more than 30 percent for some apartments and increasing reports of mortgage defaults. Like so many other sectors of China’s super-charged economy, massive investor speculation led to a real estate boom in the nation’s financial hub of 17 million people that saw prices double in the three years from mid-2002.”
“Since then developers have cut prices, small real estate shops have gone bankrupt and many first time homeowners have begun feeling the squeeze on mortgages now worth more than the homes purchased.”
“One example of rising home-loan defaults, Song said, was in Xianfeng district, a 40-minute drive southeast from the center of Shanghai. One hundred-meter flats there which were selling for 500,000 yuan (62,000 dollars) in the middle of last year had now dropped by more than 33 percent, according to Song. ‘Most investors borrowed 350,000 yuan from the bank but due to the shrinking market and the poor location, these houses are just not worth that much any more,’ said Song.”
“The most common result is that investors are returning the property to the bank and waiting to see how much the bank can get for it. Unfortunately, many investors will still need to pay back loans since the houses just cannot sell for what they were bought,’ Song said.”
“Last year bad housing loans hit 1.55 billion yuan, up from 558 million yuan in 2004, according to official statistics. ‘It’s a systemic risk if you are a Shanghai bank,’ warned UBS economist Jonathan Anderson.”
“Yet it was not so long ago that the Shanghai housing market was so tight that prospective buyers had to queue for tickets to enter a bid for a new apartment in an unfinished block. It was usually a foul tempered affair too. People jostled as they waited for hours, sometimes days, only for many to be turned away.Those lucky enough to secure bid tickets also often found that the best units had been pre-sold to those with inside connections.”
“At times even the tickets themselves became a saleable commodity but now the party of irrational exuberance is over.”
“The full extent of Australia’s housing downturn is becoming clear. Construction started on significantly fewer homes in the three months to December. The first concrete was poured on 35,846 new homes during the December quarter, that is almost 9,000 fewer than the recent peak in the March quarter of 2004. It is down a very sharp 7.5 per cent from the September quarter. In six out of the past seven quarters now, housing starts have been falling. Housing construction activity has fallen to its weakest point since the GST took the wind out of its sails in mid-2001.”
“On a state-by-state basis, the number of housing starts fell everywhere except in the Northern Territory, where they rose 16.8 per cent. For the December quarter, starts were down by 21.1 per cent in the ACT, 13.1 per cent in Tasmania, 12.6 per cent in NSW, 12.5 per cent in Victoria, 6.8 per cent in SA, 4.5 per cent in Queensland and 3.2 per cent in WA.”
“Master Builders Australia chief economist Peter Jones said if the trend continued it could create a housing shortage. ‘While general confidence remains solid, uncertainty related to house prices and interest rate speculation may hold back new home buyers in the short term, with the risk of a more protracted and steeper decline in housing,’ he said.”
The sad thing is Irrational Exuberance knows how to hop. It has been fed by Papa Greenspan for 15 years.
It wasn’t just the Fed. The EU and Japan also have been creating too much funny money for years. The Economist magazine pegged this one months ago.
Don’t they talk to each other?
They do, and if you read the G7 minutes and BIS reports, this tightening has been in the works for a while.
My point is that Papa Greenspan has been leading the world (and inducing EU, China to do the same; Japan is another story.) in inflating in the past 15 years by flooding the world with cheap dollars.
And I don’t think he is an honest central banker.
Nice oxymoron there…
haha, you got me here.
What I meant to say is that he’d got a hidden agenda other than keeping the markets stable. And his hidden agenda is ….
Comment by johndicht
2006-03-21 10:53:08
And I don’t think he is an honest central banker.
He’s the biggest beepy eye crook alive today. He made a comment that will send many people into their early grave by telling them a year or so ago to borrow with variable rate since it has tradionally saved borrower more money than fixed rates. What’s so reckless with the comment was the timing of it and the fact that we were at the lowest rate in 40+ years. This man ought to be hung for making such a statement in his then position.
I do think, though, that rates will keep and have to be kept creeping up as long as US government and consumers keep on borrowing. The more we borrow, the higher our borrowing costs are. That’s banking 101.
Another reason is political. We are not making a lot of friends around the world lately. If we keep punching people in their faces, would you expect them to charge you higher rates or not, if they are ever going to lend you money?
Hey - I have something to say here about a “global tightening” from a personal perspective.
Over the last 7 or 8 years I have at least tripled my annual personal income. Combine that with my fiancee and we are making 5x what we did before each going to graduate schools.
So what has happened in the meantime? M3 has doubled? Isn’t that right? The world has become awash in easy money (and truthfully, maybe that explains some of our income gains - but certainly not all or even most of it).
Home prices for a family, where we live, were never cheap - but now they are beyond belief by any fundamental measure.
In any “other normal time”, perhaps we’d be homeowners by now. But this whole ugly thing will have to unwind for that to happen.
It’s an overused term around here, but I will emphasize again:
“Ugly”
I went back and did the math - it’s not 5x, but around 4x.
Still a high figure, given how much time in school - and which I think still demonstrates the craziness in real estate.
And I think it’s not an uncommon situation around here.
I thought Britain and Australia had already safely completed “soft landings” and that the future was coming up roses?
Looks more like the mythical dead-cat-bounce to me. RE prices will be heading much lower in both of those countries, and here in the US as well.
This brings up a good comparison. From the China article:
‘The central government initiated measures in April and May last year to quell worries over bubbles in the property sector across the country. It imposed nationwide varying capital gains taxes linked to the length of a buyer’s holding period, the banning of pre-completion sales and a tightening of land-use rights.’
‘Under pressure from the central government, Shanghai enacted even stiffer regulations, requiring homeowners to pay off their existing mortgages before selling a property. In March it also raised the floor lending rate for housing loans of five years or more by 20 basis points to 5.51 percent, while loans now require a downpayment of 30 percent of the price, up from 20 percent.’
Some lending measures like these would have saved the US years of over-valuations. If, for instance the OCC had required more down-payment in early 2004, rather than the zero down, we may not be in this mess. Too draconian? Don’t the taxpayers backstop the banking system? And doesn’t our tax code make the speculative game worse?
Ask the retailers in the UK if things are so great. People there are saddled with more debt than ever and can’t spend. In AU, the construction sector is dragging down the economy. A quick correction is preferable, IMO. And the Chinese are proving that you don’t have to rely on rates alone to bring about the neccesary correction.
If a downpayment of a $100,000 (20%) was required to buy in my “pocket” neighborhood it’s a sure bet it wouldn’t be so overpriced.
I also wonder how much affordable housing programs have contributed to overvaluation in the housing market? 10 news here in San Diego ran a story about a couple who purchased a home for $425,000. The couple received a $15,000 grant for their downpayment and $106,000 silent second with no interest and no payments for 30 years as long as they don’t sell. With $120,000 easy money I doubt this couple gave much thought to how overpriced the home they were buying was.
And here I waste my time working and saving.
What a joke.
My in-laws found out the young couple that bought their home a year ago used 9/11 Relief money. It was arranged thru their broker. We’re about 5 hours away from Ground Zero and they did not own a home or a business there….just a loophole their broker helped them with.
Strangely, Stephen Roach once criticized these same Chinese restrictions on lending as relics of a “command” economy. I guess he made the same mistake that many of us did in seeing this bubble as being fostered by low rates rather than loose lending standards.
When it’s time for the usual post-equine-escape locking of the barn door, the Fed will probably get a new regulation that sets required down payments at 20% (a la the 50% margin requirement on stocks).
UK started down 6/04
5-8% off in 20 months
Sounds like a level off of prices to me…maybe the Realtors(R) are right! Or maybe it’s going to take a long time to decline.
It will go fast in places like Caleefornia, where the masses were led to believe double-digit YOY gains were here to stay. The unravelling of these irrationally exuberant expectations produces an immediate downward revision in buyers’ subjective valuations due to the spontaneous vaporization of the spec premium, leading many Realtors (TM) and sellers to ask the inevitable question, “Where have all the buyers gone?”
It’s like they say in sailing, “What goes up must come down”.
I’ve said this before, and I’ll say it again: The UK and Australia are decent-sized economies, to be sure. But the U.S. is the big kahuna. When the Aussie downturn started … and when the UK downturn started … the US economy was still on an upslope. Strong growth here and in our manufacturing sector (also known as China) supported the GLOBAL economy, therefore blunting the imapct of the budding busts overseas. But if our housing downturn causes OUR economy to slump, I believe the dead cat bounces overseas will end. This is another reason I believe arguments for a soft landing here — citing the SO FAR flattening out we’ve seen in the U.K and Aussie markets — are misguided. Things will likely be worse here.
why? maybe if the US slumps, the ECB has a good reason to lower interest rates even further. In many EU economies housing is already severely disconnected from the performance of the national economy (whatever happens, home prices rise).
We now have 4% 30-year fixed mortgages in Netherlands (which is effectively 2% because of HMD). If there is a recession in the US, maybe the ECB will drop rates so that we have 30-year fixed mortgage rates that are effectively below 1% … so home prices could double again (as you know, it’s all about the monthly payments).
The USA is the 800-lb gorilla. Other country’s housing markets can go up in flames without arousing much interest in our largely-autarkic housing market, but when ours unravels, the rest of the world will also go down in flames.
Just my hunch…
well … I’m not so sure. I agree that Europe usually looks at the US for direction in economic matters.
But if you take total equity appreciation in this housing boom in Europe vs. the US, I am 100% sure that the extra equity that was ‘created’ in Europe by the bubble is FAR bigger than in the US. And maybe outstanding mortgage dept is bigger in Europe as well (most consumers over here don’t consume equity to the max as in the US).
Sorry to repeat the same tired argument, nhz, but remember that you guys are out of land to build on, and we are not…
Like in the US, there are good areas (at least Germany) with small or no bubbles and then there are badly bubbly areas (about all the rest). What matters about Germany is that it happens to be the biggest economy around, and since over there is no bubble and things haven’t looked too bright from growth or fiscal deficit perspective, the ECB has put us where we are now. However, as some wiser people already mentioned, interest rates are not everything, as long as they are reasonably high in real terms. Reckless consumers can be controlled by tightening otherwise without killing the whole economy in the process. That is something we should take a lesson from China, as crazy as it sounds.
to GetStucco:
yes, I know your arguments about the fundamentals of the Dutch bubble but they are not valid.
As a start, contrary to what many people think, immigration is dropping like a rock and emigration is in full swing. Netherlands will officially be a net emigration country starting next year and probably for many years to come. Those that are leaving are generally the wealthy and well-educated, the immigrants are usually uneducated people who get wellfare or at best a very low paid job (think Mexicans coming to CA).
Population growth from birth/death rate is very small as well and dropping: most growth is from large immigrant families who have no chance at all to buy the current homes.
and as I mentioned several times before, there is PLENTY of land available, it’s just a zoning problem. My own area is just like Arizona, there are no fundamentals to support the ridiculous land prices (5-20x those from 15 years ago,
while there has been no significant change in areas used for housing, and population growth has been very small).
The only fundamental for the Dutch bubble is easy money, just like everywhere else.
I don’t really claim to know much about the latter-day Dutch bubble. I claim you don’t understand why the USA is different. In particular:
1) We have new supply (building, condo conversions, used home inventory) coming online at a record pace.
2) Home purchase demand has slumped to the lowest level in five or more years.
What could be simpler?
Burgeoning supply + vanishing demand = falling prices, and I mean fast!
More proof that the current run on housing is the result of excess global liquidity as opposed to market fundamentals.
The big question, IMO: Will there be mutually reinforcing feedback effects between these deflating bubbles on various continents?
VERY premature to spell the end of the biggest boom in history; there is NO big first world country (yet) where home prices are seriously declining. Shanghai is obviously a special case, much like some US cities with too much speculators may see some serious declines this year.
Probably the biggest ‘drop’ up to now is in Oz and even there the drop in the national averages is very small. For the UK, opinions vary wildly about whether there was a decrease or increase in prices in the last 1-2 years. The 15-year old housing bubble in the Netherlands is still expanding. Bubble markets in other countries like Spain, New Zealand, some areas in Eastern Europe etc. are still looking very healthy if you look just at the price level.
Yes, many of these housing markets have problems if you look deeper (affordability, inventory etc.), but prices are NOT declining.
And the reason is simple: there is no sign that the glut of liquidity from the central banks is ending. We have seen some tiny increases in longterm rates in the US, elsewhere longterm rates are still the lowest in history. There is no sign at all that this is the end of crazy lending and free money, there is no sign that risk is being priced into the market again.
This party will continue until all the drunken folk are totally exhausted (and because the party still attracts new visitors, that won’t happen soon), or until some really tough measures are taken to take away the punch bowl.
I bought Sydney property in Dec 2002 mostly becauase I thought I’d be moving back there. We must have made 5 offers in San Francisco and every single one was outbid by as much as US$150k. When we went back to Sydney for a visit the market seemed so much saner. The locals thought it was a frenzy but it had NOTHING on San Francisco. We bought in a few days, and with confidence. Not only that, but the banks just about wanted our first born despite the fact we put 25% down.
No matter how crazy things got in Sydney I maintain that it was never even close to what we’ve seen in CA. A completely rational market in comparison.
I don’t think you can use Australia as a model for the US this time around.
More recently, I thought I’d be lucky to break even (after expenses) if it sold today. I just heard that an almost identical condo in my building (there are only 4) just sold for AUD$370k (US$266k) more than I paid. The ‘correction’ in Australia has been very orderly indeed.
When US housing bust, US consumption will bust, Chinese exports will bust, demand for Australian raw materials will bust and your condo will bust. The US economy is like the expression, “When the cops raid the house of ill repute they take the piano players with them”. Why is it that people that have benefited by the world wide credit bubble do not face the fact that the odds favor their investments will go into reverse when the party ends? I do not care if your condo is in Nepal or Timbuktu, it is going down. It is normal for weaker markets to top first in a cycle. Often their decline is the deepest.
You know, I have read your comments here about NL and I have studied many European and find some clear differences from what you describe compared to these reports. I.e. that things are not as rosy and that the market in NL had stalled. One observations though is that housing prices were extremely low ca. 1990 compared to for example
Scandinavia or Germany which has been in a 25 year bear market. Holland is very densely populated and similar income levels.
In London my friend bought pre-construction property a few years ago and on delivery in late 2003 he had already lost the d20% ownpayment. So even though the medians in the UK look good, I am sure that there are apples-to-apples comparisons that are bad. I am following condos in McLean, VA that spiraled from $100k in 2001 to $375 mid-2005. Some brave people pushed for $400k but they wouldn’t sell. (An extreme test of the market was $419k asking.) Now they sit on the market and sell for $320-$340k and I think $300k is approaching quickly.
The Danish market has stalled. It was refueled by laws at the end of 2003 that allowed interest-only loans that now dominate the upscale neighborhoods. An analysis by a mortgage bank estimated that prices are 20% higher today than they would be without loans and sure enought the greater CPH market was up 22% in 2005. The latest reports now show that the market has stalled and investors are pulling out — just like the US bubble markets.
I agree that the national averages do not say everything, and that the markets are not healthy when you look at inventory, debt levels etc., but facts are facts: there are NO broad price declines in Europe (yet).
In Netherlands, last year the national average prices increased 5% (and 20% in my province, Zeeland); it is easy to check these facts from the ‘Kadaster’, an independent authority. There are some isolated areas / market segments that had minor price declines but the general picture is very clear. If people lost money on a home in the Netherlands in the last year (or last 15 years), they did something stupid.
For UK: I think it is not much different from Netherlands. In both countries the double-digit growth stopped a few years ago but the market is still expanding slowly. People who speculated in the London market in the last years got burned (with the prime minister as the prime example); that is similar to what happened in Sydney, and what will happen in some US cities in the next 1-2 years.
Denmark is not a good example for Europe. They have their own economic problems because they are outside the euro-zone, and some years ago they removed the HMD which obviously was a problem for home prices (in the Netherlands, removing HMD would probably cut prices in half).
I don’t know much about Scandinavia, but Germany obviously is the worst example in this discussion. Germany is NOT in a RE bear market, Germany simply never had a housing bubble because of the huge economic cost of the reunion with former East-Germany.
In the other major EU bubble markets like Spain the picture is also clear: the market is still holding up or expanding further.
Denmark is effectively in the euro zone as the DKK is linked to the Euro and the national bank policy pretty much has to follow the EU.
Also, yes, Denmark has mortgage interest deduction. With people paying 60-80% income tax then it is a huge incentive to get a big loan on an expensive house for a high wage earner. It is a critical lubricant in this high tax country.
However, the socialists cleverly slapped a tax on “rental value”, I think around 2000. In other words you are taxed on the theoretical rental value of the house that you occupy, which is very painful for people who live in nice houses, i.e. the rich. There was a big uproar but they pushed it through.
Interest rates were very high in the late 1980s and early 1990s just like the US. The Swedish housing market was in bad shape (like LA or Boston) in the early 1990s. You have to remember that the Swedish national bank put the fed funds rate up to 500% in 1992 to try to save the SEK…. ha-ha.
Also taxes are even higher in DK and Sweden than in NL so that’s not an excuse.
Todays crazy 3% interest rates are all ARMs, however. I am looking at http://www.sbab.se and the loans range from 2.99% to 4.5% with latter being a 10 year ARM hybrid.
Also Denmark and NL have the worst mortgage debt to disposable income of 200%. That’s double the UK, US, etc.
Yes, Germany has been in a bear housing market since 1975! The real prices of houses have dropped on average over this period gradually but steadily.
Also, I apologize, I did some reading, and NL’s market appears to have an reinvigorated bubble. My latest info was from 2004 when things looked down. Actually there a lot of similarities between DK and NL in terms of the high mortgage indebtedness driven by high taxation and the desire for mortgage deduction.
Copenhagen was the house price inflation capital of Europe in 2005 with +25%. Sigh…..
p.s. Finland is not in Scandinavia! Also, the country had a particularly bad recession when the Soviet Union unraveled.
One observations though is that housing prices were extremely low ca. 1990 compared to for example
Scandinavia or Germany
that could be, but mortgage rates were around 12% around 1990 (I know, I purchased a home around that time); they were probably lower in most other countries (remember, all EU countries had their own currency and interest/mortgage rates then). Income levels in NL were certainly far below those in Scandinavia at that time as well, and income tax was up to 72%. In NL around 1990, housing was considered extremely unaffordable, despite the ‘low prices’.
There are stories about people from Scandinavia who came here in the eighties by the busload and purchased Dutch property unseen (much like the tours we sometimes read about on this blog). Scandinavia must have been in a severe bubble at that time …
It was. Scandinavian countries, especially Finland, experienced a devastating housing collapse caused by several different reasons. The lesson learnt is that if a bubble explodes with a bad recession, house prices can crash 50% in like three years. See the inflation adjusted price index graph
Nice drop around 1990-1993, huh? And the current level, inflation adjusted, is right there again.. with 95% of all mortgages as ARMs. We are becoming fb’s again..
interesting, didn’t know that - but it explains a lot.
we had a 1.5 year -40% crash in Netherlands around 1979.
Too long ago, nobody remembers. The current runup, inflation adjusted is many times bigger than before 1979.
OT, but does anyone suspect ziprealty may be strategically manipulating its data postings to help its primary constituency (Realtors TM)? Earlier today, I posted that the greater SD inventory showed 18,003 listings, but later it dropped to 17,958. Suspicions naturally arise upon noting that of the 200 most recent listings, 196 show a listing date of 3/20/06 and only four show 3/21/06. Come on, ziprealtors, you cannot hide a flood from view no matter how hard you try…
you cannot hide a flood from view no matter how hard you try…
_________________________________________
Maybe they hired old Brownie or Chertoff?!?!?
That is funny!
nhz - Been reading this board for a year and been meaning to ask you where do you live in the Netherlands?
If it ain’t Amsterdam ….. it ain’t much!
geintje!
I’m from Zeeland (for US readers: when talking about the housing market, compare it to Arizona in the US).
Get Stucco-
Yes. Last weekend I noticed this distressing trend in Zip.
I had just printed out the latest search results for the zips I check. 15 minutes later I went back to start going over my list to record price reduction and DOM info.
In the space of 15 minutes several properties had been removed! My first thought: Damn! These idiots really ARE buying into the Spring Market hype (best time to buy a house!).
Also, as you noted, it was the homes that had been RECENTLY (1-2 DOM) listed that were pulled.
The next day I checked other realty sites, only to discover that those houses that had been removed from Zip were still on the maket- a couple had open houses that weekend!
Zip has also started rolling back DOM’s.
What had looked like a responsible realty company and one that was on the side of the consumer is shifting under pressure.
I’ll still use their sit to gather info. It’s still got more info on it than others. But I no longer feel obligated to use their realtors when I go out to buy a house.
They are shifting from “champion of the buyer” to “champion of the status quo”.
Check out what happened to Enron if you want to see where these sort of deceptions lead…
Ah, that explains a few things. I’ll have to do more of my own tracking on properties in my notes there.
This little bumps in their reporting will not distort the picture other than temporarily. This morning, I see 18,014 greater SD homes, 130 of them newly listed yesterday (3/21/06). 5595, or 31%, are indicated as having a reduced price…
OT, but earlier in Jan, Feb, etc the talk was about the creation of an Irani oil boursa in euro’s that was supposed to go into effect on March 20th. Can’t find any updated ref’s to it. What’s up. Remember on the 23th the Feds stop reporting on M3.
The Iranian oil bourse having any effect on any market was part of sad conspiracy theories from the internet fringe. It has been postponed until the summer at least and was going to start trading in USD anyway.
I found an interview with the British consultant who succinctly answered when he was asked about the possibility of some of the consipracy theories: “Bollocks”.
I read that consultant’s report. He considered things from a purely economic perspective, whereas the IAB is entirely a politically-driven move. IMHO, he’s dead wrong.
OK, San Diego County went over 18,000 on zip.
I am wondering how many homes for sale are not included in these figures that are new homes the developer is selling direct, new downtown condos, etc. Of course the FSBOs are also not counted. But it seems with all the building going on, eastern Chula Vista is one huge construction zone, the percentage of inventory that is bypassing the realtors is very large.
I appreciate this blog carrying overseas developments.
but there is no bubble. At least not on a national scale… so how can there be an international bubble? Bubbles are only regional. so how many regional bubbles do we have to see before it gets to be called a bubble?
there is an international bubble of free money and it spreads to all places where it can be used at the fastest rate. The biggest sector worldwide to use all this free money is real estate.
First of all, this money ends up in the financial capitals and the surrounding areas (in Europe: 1990-1995 Randstad in Netherlands, London-UK, Madrid-Spain etc.). After that it spreads to the areas where the wealthy people from those cities buy second homes, spend their vacations and investment money (in Europe: +/- 1995-2000 France, Spanish Costas, parts of Italy, Ireland etc.) and nearby areas where there are opportunities for speculation (after 2000: parts of Eastern Europe, Balkan countries, Turkey, Dubai) etc.
As goes Shanghai…
…so goes The World.
Flipping took the Bubble up…
…and now the absence of flipping…
…will burst the Bubble into tiny little atomic pieces.