Monday, April 19, 2010

It’s different this time? Just like dot.com was different.

Jeremy Grantham on Bubbles

There's nothing more dangerous and damaging to an economy than a great asset bubble that breaks. 32 out of 34 historical bubbles have moved back the trend prior to the bubble forming. There are no exceptions and the two that are outstanding are the UK and the Australian housing bubbles sustained by floating rate mortgages where the rates came down so fast they protected the bubble. Now we have to see what happens when interest rates rise. If they do not go back to the long term trendline which is a multiple of family income it will be the first time in history that such a bubble has not broken. That is not something I would want to bet on if I was thinking of buying a house.

Posted by ontheotherhand @ 05:40 PM (3643 views)
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9 thoughts on “It’s different this time? Just like dot.com was different.

  • I’m surprised there is a bubble in Australia, they don’t have low interest rates like us (they did, but they put them back up again, recently).

    What’s the Australian equivalent of the Haliwide indices we have in the UK? They should be going down fast, right now, shouldn’t they?

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  • britishblue says:

    It could be that a lib/lab coalition gets in at the election and sets up a an almighty house price crash in 4 years time for a new incoming Tory administration in 2014. With low interest rates, a highly devalued and floating pound and a reversal in sentiment it could be that the bubble is gently stroked along for a few years. But that is only going to mean that the impending crash should be far worse when it actually happens.

    Is there a book that covers the 32 bubbles? If there isnt someone should write one.

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  • markj69 str05 says:

    The next gov’t have 4 yrs. The markets need to correct (Artificial influences such as Low IR and £170b QE do not compliment the UK deficit). IMO, crash it quick, and hope for stability and recovery well before the next Gen Election. However, after the last HP recovery 96/97 the Tory gov’t were still kicked out – And dramatically so.

    Expect the post-GE assessment to be bad, very very bad. 4 years will probably be just enough time to put things right, then and only then will the economy and HP markets stabalise. So the next Gov’t will need at least 2 terms to complete the correction. Or so well be told. And lets face it, it took 6-7 years before recovering after the last crash, and the 2007 bubble is a monstrous mountain in comparison.

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  • fallingbuzzard says:

    Easy. Quick application of monetary and fiscal stimulus. High levels of business and consumer confidence. Exposure to high growth Asia, massive mineral resources in demand. Strong population growth, housing shortage. Low public debt. Healthy financial sector – tougher lending stands and stronger system overall. A faster and bigger devaluation in between July and October 08. The real surprise is how a bubble can be sustained here.

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  • fallingbuzzard says:

    Easy is the response to post 1, not post 3. There is no easy answer to that one.

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  • Alan – The Australian market, as far as I can see, is supported by outside money, government stimulus, and the commodities bull. Average house prices in my area are 9x median household wage. At Australia’s interest rates this is completely unsustainable. Current rates for a 5 year fixed are over 8%, so with a 10% deposit, the median household with a new mortgage will be spending 64% of its gross income on the INTEREST of the mortgage. If you add in tax etc., then there is no money for anything else. Clearly, the average person cannot buy an average home. This is unsustainable and it is why rents are at 4% of property value, or less (i.e. half the opportunity cost of the interest, and given that house prices have only shifted 5% in the last 5 years, “investors” have been losing for the past 5 years.). Even at these rates rents are high relative to salaries.

    Of course, you could argue that an average FTB historically could not afford the average house, but there is almost no property less than 7x median household wages, so this is hardly a robust counter argument. (As a point of contrast, my diviorced mother paid off a 10 year mortgage on a family home in a good part of Brisbane in the 70s working part time together with $20 a week maintenance from my father. We ate rather well too.)

    One day the music will stop and there won’t be enough chairs for everyone. I’m surprised that the music is still playing to be quite honest.

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  • 4 years, sack that, more like 4 months… The bond market will probably pull the plug very soon…

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  • She’s a looker.

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  • doomwatch I had to go and look didnt I my eyes are burning, I feel sick…lol

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