From: engelhardtlm1

2009-01-24 05:37 pm (UTC)

That is very interesting to me, actually...



Mostly because I didn't realize that there were real estate bubbles forming outside the US (I'm in the US, and those of us here have a hard time seeing past our borders - as the rest of the world is well aware).



My impression was that the UK was getting hit because a significant quantity of US debt was being held by those outside the US - so the bursting of our housing bubble - and the resulting bankruptcies and foreclosures - were creating problems mostly within the financial sector abroad.



Ends up my impression was wrong.



Another interesting point - it looks like the UK housing bubble really took off a bit before the US one did. Interesting...



Those points aside, I think you're right. This is probably a mean-reverting process - which means that property values are going to have to keep falling for a bit. From: redcalx

2009-01-25 10:57 am (UTC)

The holding of toxic debt is indeed a large part of the problem and if you look at Germany for example I think their property prices remained stable but the toxic debt has still caused bank failures (or government intervention to prevent failures).



Then you have another group of countries where property prices did enter bubble territory - with the anglo saxon countries such as the UK, Oz and NZ being notable bubbles; but all with different magnitudes and more interestingly timescales, e.g. US prices started to fall about a year before the UK where prices hovered (teetered) at the peak.



Spain I've heard is in the midst of a property price crash as well. What is the common factor behind the bubble nations? It's largely a cultural thing, anglo-saxons love to own property so there was perhaps some form of crowd/bubble dynamic forming independent of the other big factors - low interest rates and lightly regulated credit. E.g. in the UK you had Northern Rock who were borrowing from the short term low interest rate credit markets and rolling over the debt so they could sell long term mortgages. This kind of 'innovation' drove property prices in the countries where it was being used extensively. It's supply and demand - add billions of pounds/dollars into the mortgage market and the price of the relatively fixed amount of property goes up. From: tcpip

2009-01-25 02:34 am (UTC)

Thanks for posting this. I would really like to see the same graphs redone with a differentiation between land price and building price as well. I think it would be illuminating. From: redcalx

2009-01-25 10:41 am (UTC)

No problem. The problem with the land/property price ratio is that (A) there is a feedack mechanism, in that the land price changes to reflect the amount of profit a builder could make with it, and (B) Restricted supply of land in the UK is potentially part of the problem; although that's through planning regulations rather than lack of land. From: trufflesniffer

2009-01-25 09:54 pm (UTC)

This is something I've wished to see an updated version of ever since house values took a plunge.



The Economist (unfortunately can't remember when, though was BCC [Before Credit Crunch]) produced a version where ratio of house prices to earnings was displayed as an index of its (I think) 30 year average value.

If the P:E value is significantly above its historical average, it suggested, houses are over-valued from the perspective of the 'fundamentals' (they were right there). It continued by suggesting there wasn't a great reason to worry, however, because house prices tend not to go down in value, just 'stick' at a particular value long enough for the earnings to increase reduce the ratio to a more normal level (not so right there).



The graph suggests house prices still have some way to fall...

From: redcalx

2009-01-25 10:16 pm (UTC)

Yes the Economist do have a tendency to put a positive spin on things. While it's true that a rise in earnings have accounted for some or even most of the correction in the past, it's clear from the above graph that nominal property prices did fall quite substantially in the first half of the 90's.