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Bubblenomics And The Future Of Real Estate

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​ Economics is like a Monet painting. Stand too close and all you see is a bunch of seemingly random paint strokes. Back up a few steps and an image emerges.

The painting of bubblenomics started with the Plaza Accord, September 1985, where five nations agreed to manipulate the dominant currencies at the time. Japan enjoyed a 50% devaluation of the US$ vs the yen, artificially enriching its citizens so they could travel the world in busloads with eighty pounds of cameras around their necks.

The consequences of that bubble have yet to be corrected. Twentyfour years of fiscal and monetary accommodation led Japan to sport the world's largest public debt-to-GDP ratio.

​ The next big one was the US dotcom bubble, which was generating great wealth during the 1990s. More importantly, it started the era during which income and savings became “old school”. Everyone could live off and retire on never ending asset appreciation. When that bubble burst, in came Greenspan with the mother of all bubbles – the sub-prime bubble.

Amazingly enough, that mother of a bubble would soon be exceeded by the Bernanke/Yellen yield bubble. In Europe, unbeknownst to the world, the Euro/EC bubble was brewing. Sub-prime countries like the PIIGS were allowed to borrow in a manner similar to how dishwashers in the US were given loans to buy McMansions. Marginal economies such as Greece were able to buy Mercedes and import Armenians to do their work while the citizens collected pensions and crowded the coffee bars. The ability to repay was never a consideration.

This massive global bubble financing has unintended beneficiaries. China, India and other emerging markets could never have had double digit growth rates without the flood of capital from the West and the importing of jobs that were deemed unneeded by asset rich Westerners. Countries like Australia and Brazil benefited from supplying raw materials to fuel these bubbles.


In summary, in my opinion, healthier housing ratios should be no more than 1/3 of gross income, with adjustments based on other debt. As a general rule, home prices should be between 3 to 4 times annual income. Based on these guidelines, the price of real estate is far too expensive today, or, more precisely, the cost of housing is too high.

The correction does not have to come from price depreciation, but could come from obsolescing environmentally unfriendly tracts and urban sprawl. Low density may need to be replaced by high density housing and better urban design to meet the life styles of the future. I think we may need another crisis before the market will wake up to the needed changes.

In the meantime, money printing and hype will continue.

Interesting conclusion, which I'm sure most on here would agree with.

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