Friday, Apr 06, 2007
Comparing the US and Euro House prices
CEPS: Bubbles in real estate?
A fantastic article written in Feb 2006.
The euro area aggregate index of real housing prices has risen almost as much as that of the US and
is now (together with that of the US) about 40% above its 30-year average. This is almost exactly
equal to the overvaluation of Japanese real estate at the height of the Japanese bubble, which was
then followed by a decade of decline.
Over the last 30 years, the euro area index for real housing prices has tended to follow that of the US
quite closely, but with a lag of about two years.
An ancillary finding is that the overvaluation (compared to a longer-term historical average) is even
larger for the UK and Australia.
Posted by sold 2 rent 1 @ 11:14 AM (159 views) Add Comment
2 Comments
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1. sold 2 rent 1 said...
Quote
"The aftermath of a strong overvaluation in the housing market is thus not a matter of a sharp, short downturn, but a long period of weak domestic demand. Even in Japan, the first year of zero growth was 1993, which was several years after the housing (and stock) market had peaked."
When did the US HP peak. Was it 12-18 months ago? That gives us 6-12 months left before a euro-area peak.
Looks like Fred Harrison will be spot on: HPC starts 2008, depression starts 2010.
Will the slump last for a decade???
I hope not - but things are worrying
2. royston said...
I think the decline will be a crash this time around - more along the lines of the 1930s depression than the Japanese slow decline. I believe this for the following reasons:
1. Asset price inflation is a problem across the developed world. There is no where else to put your capital. As soon as the decline gets a grip on market psychology, you have two choices - 1) a certain amount of money now for your asset or 2) less money later for the same asset.
2. The global village. We are all much more aware of what is going on abroad - particularly in America. Take this site - we constantly pickup on US, French, Irish and Australian news about property. People WILL be gripped by a 'global bust' perspective.
3. Financial derivatives linked to the property are readily available nowadays - so there are liquid means by which negative psychology can grip the market.
4. The internet - it will broadcast the availability of the most distressed sellers and cash-rich opportunists will take advantage but only at very favorable prices.