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mdubuque
Posts: 2411
Joined: July 22nd, 2004, 9:04 pm

### Housing bubble or "froth"?

Anyone read the Letter to the Editor in the FT yesterday about "Regulation X"?Evidently back in 1948 the Fed was given the power to regulate the amount of down payment required for a mortgage and the maximum term a mortgage could be. That regulation was called "Regulation X"This apparently helped prick the housing bubble of 1948, similar to what raising the margin requirements would do in other markets.Now they are talking about bringing it back.Matthew

Cuchulainn
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### Housing bubble or "froth"?

QuoteOriginally posted by: mdubuqueAnyone read the Letter to the Editor in the FT yesterday about "Regulation X"?Evidently back in 1948 the Fed was given the power to regulate the amount of down payment required for a mortgage and the maximum term a mortgage could be. That regulation was called "Regulation X"This apparently helped prick the housing bubble of 1948, similar to what raising the margin requirements would do in other markets.Now they are talking about bringing it back.MatthewThey have to. Otherwise loans just spiral. My gut feeling is: too late.Living above one's means, rant, rant, but it's true.

DrBen
Posts: 500
Joined: February 8th, 2003, 1:24 pm

### Housing bubble or "froth"?

QuoteThe most common argument I hear against there being a bubble are the pointing out of examples of people who said the bubble would burst in Sep '04, then Dec '04, then Mar '04, and so far the prices have continued to climb...I have been telling people since Spring 04, that they should switch from real estate to stocks. Anyway, I think smart money has already felt real estate and how the only question worth asking is when to switch assets back into real estate. My view at present is just wait, but if you can get in at: (100 * monthly rent), maybe 120 months rent then get in. Whatever happens I am not expecting to get back in for 3 years. at least. What do you guys think?
Last edited by DrBen on June 4th, 2005, 10:00 pm, edited 1 time in total.

Posts: 11048
Joined: February 1st, 2005, 11:21 pm

### Housing bubble or "froth"?

Three years - me too!

RealIllusion
Posts: 22
Joined: November 13th, 2003, 12:41 pm

### Housing bubble or "froth"?

In London and the South of England currently, a typical ratio of property price to monthly rent on an equivalent property is 250 +. For example, a farly ordinary flat in London will cost £250k whereas monthly rent on a similar flat could be £1000. To get to DrBen's suggested ratio of 100 would require a major price crash or a huge hike in rents.

htmlballsup
Posts: 615
Joined: February 9th, 2004, 10:23 am

### Housing bubble or "froth"?

What do people think about the proposal of allowing property into individual pension funds with tax breaks in the UK.That is the one uncertainty in my mind over the direction of UK house prices.

DrBen
Posts: 500
Joined: February 8th, 2003, 1:24 pm

### Housing bubble or "froth"?

QuoteOriginally posted by: htmlballsupWhat do people think about the proposal of allowing property into individual pension funds with tax breaks in the UK.Houses are not investments pure and simple, over the long term house prices reflect average earnings. My view of real estate is that it is a cost which we all incurr, justlike food is a cost; the return on this cost is the revenue/salary we generate at work.QuoteIn London and the South of England currently, a typical ratio of property price to monthly rent on an equivalent property is 250 +. For example, a farly ordinary flat in Londonwill cost £250k whereas monthly rent on a similar flat could be £1000. To get to DrBen's suggested ratio of 100 would require a major price crash or a huge hike in rents.Right! So landlords accept a yield of maybe say 4% (after minimal costs), and I think this is just not sustainable. All I am saying is that to get on the other side I would want areasonable margin of safety, for example I want want the mortgage and costs to basically to covered. Say 6% interest only mortgage fixed over 25 years, 2% maintenance, 2%of time no tenants. Hence I get 10% and 100 * months rent as the purchase price.
Last edited by DrBen on June 5th, 2005, 10:00 pm, edited 1 time in total.

DrBen
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### Housing bubble or "froth"?

"House prices fall 0.6% in May" see the report at:http://news.ft.com/cms/s/ed904556-d724- ... c8.htmlNow this fall annualized gives 7.44% fall a year, with 5% rental growth each year over a3-5 year time span I can see being able to get back into the housing market at a price/rentmultiple of 100-120 being quite realistic (maybe I will not do it but this it what I am aiming at).In fact, this is the exact line I told someone whose estate I look after, moreover the cash fromthe residential sale I brought defensive stocks: BT, BAT, GSK etc aiming at a total annual returnof 9%, when the price is right I will switch back into real estate; but as I said I cannot see that beingfor another 3 years at least (maybe even 5 years).

Collector
Posts: 4651
Joined: August 21st, 2001, 12:37 pm

### Housing bubble or "froth"?

Interesting article on bloomberg today: here is small part of long story:..."By Craig Torres and Amy Strahan June 8 (Bloomberg) -- Federal Reserve governors and other U.S. banking regulators are growing concerned that easier credit standards and greater use of interest-only loans are fueling home price speculation, increasing risks to the U.S. banking system as interest rates rise........Central bankers and regulators say they are concerned at the prospect of a real-estate bust that would cascade through the banking system, causing even healthy banks to pull back on lending. That would limit the ability of the Fed to influence bank lending and the economy through interest-rate policy. Real estate busts have a long duration and they affect everybody,'' said Harvey Rosenblum, executive vice president of the Dallas Fed. Banks have difficulty raising capital to make new loans, and the capital they have is constrained by loan losses, he said. .........."

mdubuque
Posts: 2411
Joined: July 22nd, 2004, 9:04 pm

### Housing bubble or "froth"?

Some pretty reputable folks point to the 1927 Florida real estate crash as being a major contributing factor to the stock market collapse of 1929.Matthew

Collector
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Joined: August 21st, 2001, 12:37 pm

### Housing bubble or "froth"?

By 1933 half of all US banks that existed in 1929 had failed, also banking crisis spread to many other countries.Today I guess almost anybody would tell the financial system is much more secure, but is this really the case?, with increased globalization and high leverage in real estate "world wide" it is may be worth a discussion???

mikebell
Topic Author
Posts: 1698
Joined: July 1st, 2003, 5:23 am

### Housing bubble or "froth"?

Sornette says that a) we are in a bubble and b) bubble will burst around mid 2006.http://arxiv.org/PS_cache/physics/pdf/0506/0506027.pdf

mikebell
Topic Author
Posts: 1698
Joined: July 1st, 2003, 5:23 am

### Housing bubble or "froth"?

Don't have much free time to read/post anymore but this is a quick one... Housing, the biggest bubble in history!QuoteThe global housing boomIn come the wavesJun 16th 2005From The Economist print editionThe worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it popsNEVER before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stockmarket bubble burst in 2000. What if the housing boom now turns to bust?According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over$70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.The global boom in house prices has been driven by two common factors: historically low interest rates have encouraged home buyers to borrow more money; and households have lost faith in equities after stockmarkets plunged, making property look attractive. Will prices now fall, or simply flatten off? And in either case, what will be the consequences for economies around the globe? The likely answers to all these questions are not comforting.The increasing importance of house prices in the world economy prompted The Economist to start publishing a set of global house-price indices in 2002 (see article). These now cover 20 countries, using data from lending institutions, estate agents and national statistics. Our latest quarterly update shows that home prices continue to rise by 10% or more in half of the countries (see table). America has seen one of the biggest increases in house-price inflation over the past year, with the average price of homes jumping by 12.5% in the year to the first quarter. In California, Florida, Nevada. Hawaii, Maryland and Washington, DC, they soared by more than 20%.In Europe, prices have long been at dizzy heights in Ireland and Spain, but over the past year have also spurted at rates of 9% or more in France, Italy, Belgium, Denmark and Sweden. Both France (15%) and Spain (15.5%) have faster house-price inflation than the United States.By contrast, some housing booms have now fizzled out. In Australia, according to official figures, the 12-month rate of increase in house prices slowed sharply to only 0.4% in the first quarter of this year, down from almost 20% in late 2003. Wishful thinkers call this a soft landing, but another index, calculated by the Commonwealth Bank of Australia, which is based on prices when contracts are agreed rather than at settlement, shows that average house prices have actually fallen by 7% since 2003; prices in once-hot Sydney have plunged by 16%.Britain's housing market has also cooled rapidly. The Nationwide index, which we use, rose by 5.5% in the year to May, down from 20% growth in July 2004. But once again, other surveys offer a gloomier picture. The Royal Institution of Chartered Surveyors (RICS) reports that prices have fallen for ten consecutive months, with a net balance of 49% of surveyors reporting falling prices in May, the weakest number since 1992 during Britain's previous house-price bust. The volume of sales has slumped by one-third compared with a year ago as both sellers and buyers have lost confidence in house valuations. House-price inflation has also slowed significantly in Ireland, the Netherlands and New Zealand over the past year.Since 1997, home prices in most countries have risen by much more in real terms (ie, after adjusting for inflation) than during any previous boom. (The glaring exceptions are Germany and Japan, where prices have been falling.) American prices have risen by less than those in Britain, yet this is still by far the biggest boom in American history, with real gains more than three times bigger than in previous housing booms in the 1970s or the 1980s.The most compelling evidence that home prices are over-valued in many countries is the diverging relationship between house prices and rents. The ratio of prices to rents is a sort of price/earnings ratio for the housing market. Just as the price of a share should equal the discounted present value of future dividends, so the price of a house should reflect the future benefits of ownership, either as rental income for an investor or the rent saved by an owner-occupier.Calculations by The Economist show that house prices have hit record levels in relation to rents in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. This suggests that homes are even more over-valued than at previous peaks, from which prices typically fell in real terms. House prices are also at record levels in relation to incomes in these nine countries.America's ratio of prices to rents is 35% above its average level during 1975-2000 (see chart 1). By the same gauge, property is “overvalued” by 50% or more in Britain, Australia and Spain. Rental yields have fallen to well below current mortgage rates, making it impossible for many landlords to make money.To bring the ratio of prices to rents back to some sort of fair value, either rents must rise sharply or prices must fall. After many previous house-price booms most of the adjustment came through inflation pushing up rents and incomes, while home prices stayed broadly flat. But today, with inflation much lower, a similar process would take years. For example, if rents rise by an annual 2.5%, house prices would need to remain flat for 12 years to bring America's ratio of house prices to rents back to its long-term norm. Elsewhere it would take even longer. It seems more likely, then, that prices will fall.A common objection to this analysis is that low interest rates make buying a home cheaper and so justify higher prices in relation to rents. But this argument is incorrectly based on nominal, not real, interest rates and so ignores the impact of inflation in eroding the real burden of mortgage debt. If real interest rates are permanently lower, this could indeed justify higher prices in relation to rents or income. For example, real rates in Ireland and Spain were reduced significantly by these countries' membership of Europe's single currency—though not by enough to explain all of the surge in house prices. But in America and Britain, real after-tax interest rates are not especially low by historical standards.Betting the houseAmerica's housing market heated up later than those in other countries, such as Britain and Australia, but it is now looking more and more similar. Even the Federal Reserve is at last starting to fret about what is happening. Prices are being driven by speculative demand. A study by the National Association of Realtors (NAR) found that 23% of all American houses bought in 2004 were for investment, not owner-occupation. Another 13% were bought as second homes. Investors are prepared to buy houses they will rent out at a loss, just because they think prices will keep rising—the very definition of a financial bubble. “Flippers” buy and sell new properties even before they are built in the hope of a large gain. In Miami, as many as half of the original buyers resell new apartments in this way. Many properties change hands two or three times before somebody finally moves in.New, riskier forms of mortgage finance also allow buyers to borrow more. According to the NAR, 42% of all first-time buyers and 25% of all buyers made no down-payment on their home purchase last year. Indeed, homebuyers can get 105% loans to cover buying costs. And, increasingly, little or no documentation of a borrower's assets, employment and income is required for a loan.Interest-only mortgages are all the rage, along with so-called “negative amortisation loans” (the buyer pays less than the interest due and the unpaid principal and interest is added on to the loan). After an initial period, payments surge as principal repayment kicks in. In California, over 60% of all new mortgages this year are interest-only or negative-amortisation, up from 8% in 2002. The national figure is one-third. The new loans are essentially a gamble that prices will continue to rise rapidly, allowing the borrower to sell the home at a profit or refinance before any principal has to be repaid. Such loans are usually adjustable-rate mortgages (ARMs), which leave the borrower additionally exposed to higher interest rates. This year, ARMs have risen to 50% of all mortgages in those states with the biggest price rises.The rapid house-price inflation of recent years is clearly unsustainable, yet most economists in most countries (even in Britain and Australia, where prices are already falling) still cling to the hope that house prices will flatten rather than collapse. It is true that, unlike share prices, house prices tend to be somewhat “sticky” downwards. People have to live somewhere and owners are loth to accept a capital loss. As long as they can afford their mortgage payments, they will stay put until conditions improve. The snag is that eventually some owners have to sell—because of relocation, or job loss—and they will be forced to accept lower prices.Indeed, a drop in nominal prices is today more likely than after previous booms for three reasons: homes are more overvalued; inflation is much lower; and many more people have been buying houses as an investment. If house prices stop rising or start to fall, owner-occupiers will largely stay put, but over-exposed investors are more likely to sell, especially if rents do not cover their interest payments. House prices will not collapse overnight like stockmarkets—a slow puncture is more likely. But over the next five years, several countries are likely to experience price falls of 20% or more.While America's housing market is still red hot, others—in Britain, Australia and the Netherlands—have already cooled (see chart 2). What lessons might they offer the United States?The first is that, contrary to conventional wisdom, it does not require a trigger, such as a big rise in interest rates or unemployment, for house prices to decline. British home prices started to fall in the summer of 2004 after the Bank of England raised rates by a modest one and a quarter percentage points. Since 2002, the Reserve Bank of Australia has raised rates by exactly the same amount and unemployment is at a 30-year low, yet home prices have fallen. The Federal Reserve's gradual increase in rates by two percentage-points over the past year has done little to scare away buyers, because most still have fixed-rate mortgages and long-term bond yields have remained unusually low. But as more Americans have been resorting to ARMs, so the housing market is becoming more vulnerable to rising rates.Rung at the bottomBritish and Australian prices have stalled mainly because first-time buyers have been priced out of the market and demand from buy-to-let investors has slumped. British first-timers now account for only 29% of buyers, down from 50% in 1999. And, according to the National Association of Estate Agents, buy-to-let purchases are running 50% lower than a year ago. As prices become more and more heady in America, the same will happen there.British experience also undermines a popular argument in America that house prices must keeping rising because there is a limited supply of land and a growing number of households. As recently as a year ago, it was similarly argued that the supply of houses in Britain could not keep up with demand. But as the expectation of rising prices has faded, demand has slumped. According to RICS, the stock of houses for sale has increased by one-third over the past year. America has faster population growth than Britain, but its supply of housing has also been rising rapidly. Economists at Goldman Sachs point out that residential investment is at a 40-year high in America, yet the number of households is growing at its slowest pace for 40 years. This will create excess supply.Another mantra of housing bulls in America is that national average house prices have never fallen for a full year since modern statistics began. Yet outside America, many countries have at some time experienced a drop in average house prices, such as Britain and Sweden in the early 1990s and Japan over the past decade. So why should America be immune? Alan Greenspan, chairman of America's Federal Reserve, accepts that there are some local bubbles, but dismisses the idea of a national housing bubble that could harm the whole economy if it bursts. America has in the past seen sharp regional price declines, for example in Boston, Manhattan and San Francisco in the early 1990s. This time, with prices looking overvalued in more states than ever in the past, average American prices may well fall for the first time since the Great Depression.But even if prices in America do dip, insist the optimists, they will quickly resume their rising trend, because real house prices always rise strongly in the long term. Robert Shiller, a Yale economist, who has just updated his book “Irrational Exuberance” (first published on the eve of the stockmarket collapse in 2000), disagrees. He estimates that house prices in America rose by an annual average of only 0.4% in real terms between 1890 and 2004. And if the current boom is stripped out of the figures, along with the period after the second world war when the government offered subsidies for returning soldiers, artificially inflating prices, real house prices have been flat or falling most of the time. Another sobering warning is that after British house prices fell in the early 1990s, it took at least a decade before they returned to their previous peak, after adjusting for inflation.Another worrying lesson from abroad for America is that even a mere levelling-off of house prices can trigger a sharp slowdown in consumer spending. Take the Netherlands. In the late 1990s, the booming Dutch economy was heralded as a model of success. At the time, both house prices and household credit were rising at double-digit rates. The rate of Dutch house-price inflation then slowed from 20% in 2000 to nearly zero by 2003. This appeared to be the perfect soft landing: prices did not drop. Yet consumer spending declined in 2003, pushing the economy into recession, from which it has still not recovered. When house prices had been rising, borrowing against capital gains on homes to finance other spending had surged. Although house prices did not fall, this housing-equity withdrawal plunged after 2001, removing a powerful stimulus to spending.Housing-equity withdrawal has also fallen sharply over the past year in Britain and Australia, denting household spending. In Australia, the 12-month rate of growth in retail sales has slowed from 8% to only 1.8% over the past year; GDP growth has halved to 1.9%. In Britain, too, a cooling of the housing market has been accompanied by an abrupt slowdown in consumer spending. If, as seems likely, home prices continue to fall in both countries, spending will be further squeezed.Even a modest weakening of house prices in America would hurt consumer spending, because homeowners have been cashing out their capital gains at a record pace. Goldman Sachs estimates that total housing-equity withdrawal rose to 7.4% of personal disposable income in 2004. If prices stop rising, this “income” from capital gains will vanish.And after the gold rush?The housing market has played such a big role in propping up America's economy that a sharp slowdown in house prices is likely to have severe consequences. Over the past four years, consumer spending and residential construction have together accounted for 90% of the total growth in GDP. And over two-fifths of all private-sector jobs created since 2001 have been in housing-related sectors, such as construction, real estate and mortgage broking.One of the best international studies of how house-price busts can hurt economies has been done by the International Monetary Fund. Analysing house prices in 14 countries during 1970-2001, it identified 20 examples of “busts”, when real prices fell by almost 30% on average (the fall in nominal prices was smaller). All but one of those housing busts led to a recession, with GDP after three years falling to an average of 8% below its previous growth trend. America was the only country to avoid a boom and bust during that period. This time it looks likely to join the club.Japan provides a nasty warning of what can happen when boom turns to bust. Japanese property prices have dropped for 14 years in a row, by 40% from their peak in 1991. Yet the rise in prices in Japan during the decade before 1991 was less than the increase over the past ten years in most of the countries that have experienced housing booms (see chart 3). And it is surely no coincidence that Japan and Germany, the two countries where house prices have fallen for most of the past decade, have had the weakest growth in consumer spending of all developed economies over that period. Americans who believe that house prices can only go up and pose no risk to their economy would be well advised to look overseas

Cuchulainn
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### Housing bubble or "froth"?

> Americans who believe that house prices can only go up and pose no risk to their economy would be well > advised to look overseasMy uncle was in real estate business in the Hamptons (LI) in the 1980s (a bust) . He does not share this opinion.It's the age groups 25-45 maybe who have yet to experience their first crisis.

mikebell
Topic Author
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Joined: July 1st, 2003, 5:23 am

### Housing bubble or "froth"?

MS' Stephen Roach on the bubble. I fully agree with his analysis!http://www.morganstanley.com/GEFdata/di ... chor0Quick excerpt:QuoteThat something else is a bubble. Residential property has become the asset of choice for investors in a low-return world awash in liquidity. As The Economist has long stressed, this property bubble is global in scope -- by their reckoning, “the biggest financial bubble in history” (see the Special Report in their 18 June 2005 issue, “The Global Housing Boom”). The worldwide scope of this asset bubble makes it tempting to dismiss America’s problem as part of a broader, more powerful trend. Again, I would argue this is nonsense. The US is very much in control of its own destiny insofar as coping with the excesses in asset markets. In that important respect, America’s equity and property bubbles have one key ingredient in common: The principal blame for both bubbles, in my view, lies with the Federal Reserve.Unlike most other major central banks, the Greenspan Fed has long maintained that asset markets are not within the purview of its policy mandate. The Bank of England, the Reserve Bank of Australia, and, belatedly, the Bank of Japan all believe differently. Ottmar Issing of the European Central Bank has argued that asset markets pose one of the greatest challenges for modern-day monetary policy -- that central banks must now weigh “the risks associated with asset-price inflation and subsequent deflation (see Issing’s 18 February 2004 editorial feature in the Wall Street Journal, “Money and Credit”). America’s Federal Reserve sees it differently. But it wasn’t always that way. Long ago, when America’s Asset Economy was in its infancy, Alan Greenspan worried about “irrational exuberance.” But he quickly changed his mind and went on to champion the equity culture spawned by the New Economy. In my view, that was a policy blunder of monumental proportions.Burst coming in 2007!