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27-03-2017 Hits:83034 BoomBustBlog Reggie Middleton

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This is a continuation on the Op Ed pieces from BoomBustBlog readers. Enjoy!

 

Housing - Addendum on global housing bubble

Table of Contents

  • Conclusions
  • Housing Bubbles in OECD Countries
  • Housing Bubbles in Other Countries
  • Sources

Conclusions

Just a couple other notes to provide additional clarity on where we did and did not see bubbles in housing, and just how global it was. I took a good hard look around the world and found veritably huge bubbles in the following countries:

 Required Reading:

  1. Debt - Thoughts On A Global Problem (Part 1),
  2. Banking out of Control (Part 2)

Recommended Reading - The Asset Securitization Crisis: 

  1.   Intro: The great housing bull run - creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble - A comparison with the same during the S&L crisis
  2.   Securitization - dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble - declining home prices and rising foreclosure
  3.   Counterparty risk analyses - counter-party failure will open up another Pandora's box (must read for anyone who is not a CDS specialist)
  4.   The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue 
  5.    Municipal bond market and the securitization crisis - part I
  6.    Municipal bond market and the securitization crisis - part 2 (should be read by whoever is not a muni expert - this newsbyte may be worth reading as well)
  7.    An overview of my personal Regional Bank short prospects Part I: PNC Bank - risky loans skating on razor thin capital, PNC addendum Posts One and Two
  8.    Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
  9.   More on the banking backdrop, we've never had so many loans!
  10.   As I see it, these 32 banks and thrifts are in deep doo-doo!
  11.   A little more on HELOCs, 2nd lien loans and rose colored glasses
  12.   Will Countywide cause the next shoe to drop?
  13.   Capital, Leverage and Loss in the Banking System
  14.   Doo-Doo bank drill down, part 1 - Wells Fargo
  15.   Doo-Doo Bank 32 drill down: Part 2 - Popular
  16.    Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
  17.   The Anatomy of a Sick Bank!
  18.   Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank
  19.   GE: The Uber Bank???
  20.   Sun Trust Forensic Analysis
  21.   Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
  22.   Goldman Sachs Forensic Analysis
  23.   American Express: When the best of the best start with the shenanigans, what does that mean for the rest..
  24.   Part one of three of my opinion of HSBC and the macro factors affecting it
  25.   The Big Bank Bust
  26. Continued Deterioration in Global Lending, Government Intervention in Free Markets
  27. The Butterfly is released!
  28. Global Recession - an economic reality
  29. The Banking Backdrop for 2009

 

  • USA
  • France
  • Italy
  • UK
  • Canada
  • Australia
  • Denmark
  • Finland
  • Ireland
  • Netherlands
  • Norway
  • New Zealand
  • Spain
  • Sweden
  • China
  • Hong Kong
  • Singapore
  • Belgium
  • South Africa
  • Vietnam
  • India
  • Russia
  • Dubai

As can be seen from the data, we have seen a level of synchronicity that is completely unprecedented. And these bubbles were bigger than anything we had seen in our history. One pile of the mountain of global debt, then, was created out of the mistaken perception that this global house price bubble was real. It was not, but we are still left with the debt.

No picture is fully crystal clear, but it is becoming clearer and clearer by the day that this is worse than 1929, and probably worse than 1893 and 1873. This was a full fledged global debt-fueled debt, housing and consumption bubble.


Housing Bubbles in OECD Countries

This is a chart of housing price deviation from "trend" (real prices, linear trend) for the GDP-weighted index of *all* OECD countries through 2005 (source).

 

 


To update through 2006 and 2007, consider the following chart for the various OECD countries (source):

Observations:

  • Updating the % deviation chart. As noted in the table, the GDP-weighted increase in prices in 2006 and 2007 for the whole OECD were 3.6% and 1.5%. This takes our deviation from trend to approximately 20% on the 1st chart.
  • Our peak is unprecedented. The prior peaks were 5% and 10% in 1978 and 1990, versus our current 20%.
  • OECD countries that had housing bubbles - US, France, Italy, UK, Canada, Australia, Denmark, Finland, Ireland, Netherlands, Norway, New Zealand, Spain, Sweden.
  • OECD countries that did not have housing bubbles - Japan, Germany, Switzerland.

Below is a graph of Real Home Price Appreciation, 2000-2007, in the major OECD countries (source):

Observations:

  • We know how bad our bubble was, but we were outdone by Finland, Italy, Norway, Ireland, Canada, Sweden, Denmark, Australia, the UK, France, New Zealand and (most of all) France.
  • Again, only Switzerland (a bit) and Germany / Japan did not have housing bubbles.

To wrap it up, this is a chart of most of the major OECD countries' real home prices for the past 35 years on a log scale graph (source):

 

We have never seen something like this before ...

House prices in UK, 1952-2008 (source) imply 50% of downside versus Q4 08 pricing:

 

Robert Shiller in August 2007 wrote a paper which comments on the global housing bubble. He had some very interesting charts on Norway/Netherlands (top) and London (bottom) (source):




Housing Bubbles in Other Countries

One barometer for additional bubbles is what the y/y change was in Q3 2007, from this Economist article. Note though - the US was falling then by 5%, so this is a highly incomplete additional list (souce):

Who else definitely had bubbles?

  • Hong Kong
  • Singapore
  • Belgium
  • China
  • South Africa

There are other articles which make it very clear that we had a really insane housing bubble in China (source, source, source, source). Chinese officials have even said they think housing is overvalued, and wanted to institute a mandatory 50% downpayment (!). They had a huge stock market bubble (source). At the same time, Chinese citizens believed buying a house was a riskless investment. They show all the markings of a populus that is going through their first real speculative bubble.

Vietnam
Vietnam also had a property bubble. I have a friend who works for another hedge fund who said that at one point, housing prices in Saigon were higher than in Manhattan (when Manhattan prices were still really high). Articles support this (source). By August 2008, prices were down by up to 70% (source).

India
Looks like India had a bubble too (source, source), especially in metropolitan areas like Mumbai, Delhi and Chennai. Their prices apparently moved to levels seen in cities like London. They say that they are moving to parity, closing a gap that previously should not have existed. Perhaps it was the other way around. The ICIC is now saying prices *need to* fall by 20% or more (source).

Russia
Russia too had a property bubble. Russian property development companies are down by up to 90% (source). Russian business newspaper Vedomosti is calling for a fall of 15-20% in home prices this year. From the article:

"After a decade-long boom that turned Moscow into one of the world’s most expensive cities, Russia’s real estate sector has experienced the contagion of the US subprime crisis...

“Whatever credit lines were available to developers until very recently have all but disappeared,” Renaissance Capital, a Moscow-based investment bank, said in an advisory note earlier this month...

“We believe the sector is likely to experience a wave of delayed completions and project freezes, potential forced sales of development portfolios as well as smaller players’ bankruptcies,” the bank said...

“It is a frightening picture,” Polonsky wrote. "

Some other signs of a major bubble here (source):

"'Forty to fifty percent of residential property in Moscow has been bought up for resale at a later date, not for living in,' said Aven, who was ranked as Russia's 29th richest man in May by Forbes, with a fortune of $5.5 billion...

'Prices inside the Garden Ring (Moscow's central ring-road) could fall by several times,' said Aven, the 53-year-old president of Alfa Bank, Russia's largest private bank.

Moscow was ranked as the world's most expensive city on earth for expatriates in July, in a survey of living costs in 143 cities.

The Moscow property market has attracted large numbers of investors who have ratcheted up prices to levels far above what most Russians earn in a lifetime.
"


Dubai
Do I even need to mention them? (source, source)


Sources

  • "Are House Prices Nearing a Peak?" - June 2006 - OECD (source)
  • "Recent House Price Developments" - 2005 - OECD (source)
  • OECD Housing Outlook, 2008 (source)
  • "Recent House Price Developments: The Role of Fundamentals" (source)
  • "Has the Rise in Debt Made Households More Vulnerable?" (source)


Housing - Much Much Paper Appreciation?

In total, the data below implies we saw approximately $50T of paper asset appreciation in housing from 1999-2007. This is a larger amount of asset appreciation than we had during the global stock market bubble, or the stock market run-up prior to the Great Depression. It is completely unprecedented.

This was a global phenomenon. The debt fueled the asset price appreciation. Now the prices are moving back down, leaving us with (1) a record amount of debt ; (2) a record amount of current consumption coming purely from debt.


These are some of the figures provided by this most prescient of articles (source):

  • Total residential property values in developed world. By the end of 2004, total residential property in developed economies had increased in value by $30T over the prior 5 years to $70T (!), or 100%+ of those countries' GDP's.
  • Increase in value as % of GDP is unprecedented. This increase in value is greater than the global stock market bubble (80% of GDP in developed economies over 5 years), or America's stock market bubble in the 1920's (55% of GDP).
  • Increase was bigger than Japan's. The increase in home prices in Japan in the decade preceding 1991 was SMALLER than the home price increases of developed economies in the 10 years prior to 2004 (!).

I had a few other notes to add as an addendum.


(1) Adjusting developed economy home value increase to 2007 - $42T of "appreciation"

Their figures run through to 2004. We have the real figures to update to 2007 (source).

 

Global inflation in 2005, 2006 and 2007 was 2.7%, 2.5% and 2.2% (source).

Putting it all together, we saw an 18% increase in home prices in 2005-2007 in developed economies. This adds $12T to the tally of "value" creation.

$30T + $12T = $42T

$82T of adjusted residential value. A 30% haircut to this (conservative) implies $25T of asset value lost.



(2) Accounting for emerging markets

As noted earlier, some of the most tremendous growth has been in the emerging economies - China, India, Russia, Vietnam, East Europe, and the Baltics. These are completely unaccounted for.

If all these countries combined are 25% of the developed world, that would imply total residential value of $21T. $21T + $82T = $103T.

Perhaps their paper asset appreciation was $5T?

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