HOUSE PRICE CRASH

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Global House Price Crash (GHPC). I am a historian and academic researcher from the UK presently residing in Australia. I am the author of this Global House Price Crash Blog.

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Dec 22

Global House Price Crash

Sometimes in normal property cycles, the increasing cost of housing persuades buyers to borrow ever larger large amounts of debt with an aim of "getting on the ladder" before housing values inflate any more. This form of dangerous risk taking is often fueled by inappropriate interest rates kept at low levels, and ready availability of this cheap credit. These financial conditions make more expensive housing seem to be within the reach of lower income buyers, and encourages people to purchase more than one property, or larger sized houses than they really need. After a while, what was a regular property cycle may be transformed into a risky speculative housing bubble.

Housing bubbles form regularly in many global real estate markets. They often exhibit fast and non-sustainable growth of commercial and residential property prices, until values hit levels that are excessive by all standard valuation methodologies (for example ratio of value to yield, or value to income). When the bubble finally pops, dwelling values drop precipitously and the property market implodes. Usually this causes a severe recession in the economy. This type of behavior is very different to regular property cycles where the boom ends naturally and a gradual slowdown happens with no substantial affect to the wider economy.

There is some debate about whether housing bubbles can really be identified in advance. Some economists think property bubbles are only identifiable once they have burst, but other economists think there are signs that may be considered to evaluate whether the market is exhibiting the symptoms of a typical bubble. Respected economist Robert Shiller provides a seven-item checklist that can be used to determine whether a bubble exists:

-- Sharp increase in the asset prices
-- Great public excitement about increases
-- An accompanying media frenzy
-- Stories about people earning lots of money, resulting in envy among those who aren't.
-- Growing public interest in the asset class
-- New theories to justify unprecedented price rises
-- A drop in lending standards

During the past decade, some observers thought a 'global' house price bubble was brewing, since many countries around the globe were in the midst of sustained real estate booms that were just starting to show dangerous symptoms typical of a bubble. Many observers thought this global house price bubble would necessarily be followed by a global house price crash.

To understand why the many isolated real estate crashes have not evolved yet into a global house price crash, it is necessary to compare various factors present in each of the countries. The question of whether house prices should crash or keep rising can depend on the equilibrium between many social and economic factors that interact within each country. Some of the important factors include population growth, the availability of new houses, discretionary incomes, GNP, the employment rate, interest rates and credit availability, rental property yields and vacancy rates, home ownership rates and marginal tax rate.

Some countries thought to have experienced recent housing bubbles include the UK, Spain, Netherlands, Australia, USA, Canada, New Zealand, Ireland, South Africa, China and Singapore. So far the property booms in some of these countries have already popped in spectacular fashion, with the UK, USA, Ireland and Spain undergoing extremely destructive property crashes. But this crash has not yet been global and remained isolated to those specific countries. Property values other countries, such as China, Australia and Canada continue to increase in an alarming manner, and have only recently started to display the initial symptoms of peaking. This leads many observers to ponder whether this property crash will shortly become a global house price crash and once again threaten to destroy the fragile global economic recovery.

Posted 22 Dec 2010, 10:11 PM · No comments

Nov 29

UK House Price Crash

UK House Price Crash

In the early and mid 2000s global house prices rose dramatically, generating large increases in home equity for many homeowners but also making housing unaffordable for others.
Many developed countries experienced sharp increases in house prices in the early years of the new millennium.
Observers thought a 'global' bubble in property may be developing, as a multitude of countries experienced prolonged real estate booms that began to show alarming bubble symptoms.

Observers thought this global property bubble might lead to a GHPC (Global House Price Crash).
The UK story was different in a couple of regards.

1 -- the house price boom started earlier and saw more sustained increases.
2 -- the regional pattern was more uniform. Between 2002 and 2007, UK house prices rose by 90%, faster than any European nation apart from Spain.

The average house price in the Q1 1998 was £81,722, but at the peak of the market in the Q3 2007 the average price was £219,256 – over 2.5 times higher or a total increase of 168%.

Between Q1 2001 and the Q4 2006 prices increased 60% when adjusted for inflation.
House prices at the end of 2006 were 35% higher than they would have been if the long-term trend rate of growth had been maintained.
In 2008, house prices started to fall but they stabilized as of August 2009.
This may reflect the housing market's seasonality or it may indicate a real recovery.
Some analysts expect UK house prices to fall by 50% in real terms.
Real estate values in other countries, such as Australia, continue to rise, and are now beginning to show initial signs of peaking.
This leads observers to wonder if the real estate crash will become global after all.
To work out why isolated national property crashes didn't evolve into a global real estate crash we compare economic environments in each nation.
Population demographics, dwellings constructed, income levels, GNP, employment, mortgage rates, ease of credit, rental tightness, yields & taxes differ between nations.
Those things impact the real estate market.

Posted 29 Nov 2010, 09:37 PM · No comments

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