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1. What is Housing Bubble?
Nowadays, people continuously have faced the term ¡°housing bubble¡± or ¡°global housing boom¡±. Actually, people are rather ¡®been warned¡¯ than just ¡®faced¡¯
¡°The worldwide rise in house prices is the biggest bubble in history.¡± (In come, Economist)
¡°This boom is unprecedented in terms of both the number of countries involved and the record size of house-price gains.¡±(After, Economist)
Now the question is this: what exactly is the ¡®global housing bubble¡¯, so seriously considered over the world?
Global housing bubble can be referred as a general rise in the price of residential property over the world, especially over the developed countries. Some might wonder that the rise in the price over the time is something natural. However, the problem resides in that the rise is not justifiable; it is a bubble. In developed countries, the housing price increase over the past five years is equal to the combined GDP of those.(In, Economist) This is even larger than the stockmarket bubble in the late 1990s and 1920s, both of them brought the tragic economic depression.
Also, there is another proof that the rise is nothing to be laugh at. Since 1997, the home prices have risen in ¡®real terms¡¯, not in nominal.(In, Economist) The OECD suggests the relationship between house prices and rents. The rent of house means the present benefits acquired by using house, while the price implies the future benefits of ownership. Now, the ratio of prices to rents in many countries is hitting the record. Yes, this directly means that the houses are seriously overvalued regardless of the regions. (graph from hear that)
This worldwide phenomenon already has progressed far, threatening the global economy. Between 1997 and 2004, a period shorter than a decade, the total value of the houses more than doubled in Austrailia, Britain and Spain, and nearly tripled in South Africa and Ireland.(After, the Economist) More serious is the possibility for the bubble to pop up. The house price increases are based on the people¡¯s optimistic expectation that they will continuously go up. But once people realize this apparent fallacy, real house prices are very likely to fall. (Bubble, the Economist)Obviously, the world economy will suffer from the tragic after-effects of the bubble, which we will talk on later.
2. Causes of the Bubble
Basically, this global boom in house prices was driven by two primary factors: the historically low interest rates and the steep decline of the stock market in the past.(In, Economist) People were highly encouraged to borrow money for their real estates. Lost their faith in the volatile stock market, households turned their attention to the property. The housing market drew huge money and the real estate prices hit the record.
What makes this situation dangerous is ¡®the speculative hands.¡¯ Now, the prices for the house are driven by speculative demand, intrigued by the stability of the property market compared to the stocks¡¯.(In come, Economist) Even the people who don¡¯t actually need the house are buying the house simply they expect the prices to surge. Investors have been buying houses eve though rents will not cover their interest payments, purely in the expectation of large capital gains.(After, Economist) And those are the very people who will instantly sell their housings even with the slight omen for price-drop, making prices more likely to flatten rather than collapse.
The money-lenders too are exacerbating the risk. Some might deny the danger of the housing boom, mentioning the stability of market for the house, which people can actually use. However, this outwardly perfect stability is actually making the situation worse. People are much more likely to borrow money for the houses than the stocks.(After, Economist) New, riskier forms of mortage loans are alluring buyers to borrow more.(In come, Economist) Loans such as interest-only mortgage or negative amortization loans allows even people who don¡¯t have ability to pay for it to borrow money. As a result of such borrowing, housing booms tend to be more dangerous than stockmarket bubbles.(After, Economist) And as we all know, this reckless loans eventually hit the global economy this summer, with the immense confusions.
3. A Threatening Problem
- Problem on the peril; when it falls
The real danger of the global housing bubble resides in here; when the prices fall, then, we cannot manage the situation. The biggest victim of the price-falling is the home-owners. The general assumption is that when the price starts to fall, they will not flatten, but collapse. Here is a great historical example; after the bust of the price bubble, the Japanese property prices have dropped by 40% from their pick in 1991.(In come, Economist) As people fled their money during the stockmarket drop, they can suddenly lose their fortune without doing any.
As mentioned above, as the expectation of rising prices fades away, demand slumps. The excess supply will generate the steep drop in average house prices.(In come, Economist) The most worrying part is the economic recession it will bring. Explosive house-price growth encouraged consumers to keep their spending despite the external economic crisis. However, when housing market decline, the same process works in reverse: consumers have to cut back their spending and compensate for the lost home equity. And this means a slowdown in GDP. (Will the, Economist) And the sharp slowdown in consumer spending will bring a deep recession in economy.
More seriously, the slump in demand has a kind of domino-effect. A fall in American house prices be bad news not just for American homeowners, but for the rest of the world.(Will the, Economist) If the consumer spending of America decreases, many economies which depended on the exports to America can be seriously attacked. If house prices fall, and suddenly poorer Americans have to cut back on their purchases, this will shrink the supply of cheap credit from Asian central banks, pushing up interest rates and causing house prices to fall even further.(Will the, Economist)
Not only that, the enormous boosts which housing boom provided in the economy now are the he sour threats. Two-fifths 1of all American jobs created since 2001 have been in housing-related sectors such as construction, real-estate lending and broking. If house prices actually fall, this boost will turn into a substantial drag.(After, Economist)
The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion.(After, Economist)
- Opposing point of view
Of course, there are some optimistic views too. Some people argue that the rise in housing prices is natural, since the low interest rates which made the buying home cheaper justify higher prices in relations to rents.(In come, Economist) However, even though the nominal interest rates can cover the rise in prices, the actual impact of the real interest rates including the rate of inflation are not that huge to offset the increase.
Others are asserting the stability of the property market. Since houses are not paper wealth like stocks, they are less vulnerable to the price collapse, people argue. Obviously, the smaller liquidity of houses lessens the possibility of a price crash.(After, Economist) However, the housing boom in nowadays is too serious for this stability to offset. As told, the boom, which stretches over the world, is the biggest economic bubble throughout the history. There are numerous elements for danger, including the reckless investors and subprime money lenders.
- Learning from the past
As we all remember, there was a frantic real-estate boom in Japan around the late 1980s. The catastrophic outcome of the bubble, which still exists now, offers a valuable lesson to us.
In 1991, the summit of the Japanese real estate bubble, Mr.Nakashima took out a loan for $400,000 to buy an apartment in suburb. Mr.Nakashima, who was then a government employee, believed that he could easily earn back loan with selling the house with the double-digit price increase rate. Unfortunately, however, the collapse of the market doomed and made his apartment worth half what he paid. 14 years after, Mr.Nakashima still owes $300,000 to bank and cannot move from the house; the sale price does not cover the debt. He says, ¡°The collapse of the bubble robbed us to choose where we can live.¡± (Fackler, New York Times)
The outcome is not only restricted in the personal area. After the bust of housing prices, the Japanese economy faced a huge, long-lasting depression. The Japanese economy, which is the second only to that of U.S., had spent 11 years sliding in and out of recession.(Fackler, New York Times) It is now only faced the portent of recovery.
There is no warrant that the global economy will not face that kind of recession. The rise in prices in Japan during the decade before 1991 was less less than the increase over the past ten years in most of the countries that have experienced housing booms.(In come, Economist) Of course there are some conspicuous differences between the Japanese boom before and that of nowadays; we don¡¯t have deep-pocketed corporations pumping up the commercial property market, and the stock market is relatively stable.(Fackler, New York Times) However, still the similarity between the past and the present is too prominent to be left at. We have to hold the string of tension stalwartly.
4. The Predicted Disaster; the Tragic Bust
- Continued warnings
This is not a new problem. Various kinds of magazines and newspaper have warned questioned the bubble in the prices in the property market, and warned the possibility of the falling. Especially, British magazine The Economist has stressed the danger ever since 2004. However, during the boom, people usually don¡¯t believe that house-prices will eventually go down.
At the beginning of this year, UN has warned- blab la bla. Maybe the crisis was unavoidable. Eventually, from America the bubble began to pop up, extending its effects throughout the global economy.
- Bubble starts to pop up
During the boom, everybody was blind. People borrowed money without seriously thinking; the soaring house-prices seemed to cover all the debts. Banks provided risky loans recklessly; even subprime lenders seemed to be able to pay back the money after all. At last, investors and lenders started to wake up. And that was the beginning of the nightmare.
The first was the United States; credit markets have collapsed, generating so called subprime mortgage crisis. The situation is dire in America. There, the deadly combination of loose lending practices and higher interest rates has created a prolonged, and ever-deepening, bust.(Abandon, Economist)
Residential construction has plunged and house prices have fallen. Mortgage defaults have soared, particularly among the least credit-worthy subprime borrowers. Home-owners who took out mortgages at cheap introductory rates face sharply higher payments as these loans reset. There have been plenty of financial-market casualties. The latest was American Home Mortgage Investment, a largish lender which declared that it would no longer fund home loans. (Abandon, Economist)
Almost certainly, there is worse to come. With demand weak and the stock of homes for sale close to its highest level for 15 years, prices are likely to fall further. Tighter lending standards will reduce the supply of new homebuyers, putting further downward pressure on prices. This squeeze(along with higher petrol prices) has already dampened consumer spending-and is likely to continue doing so.(Abandon, Economist)
There is no other country which faced ¡®the bust¡¯ like America so far. However, the crisis in American economy, the biggest in the world, is equal to the crisis in the world¡¯s. Numerous countries indirectly suffered from the effects of the crisis; the most conspicuous one is the Asian stock market collapse. The subprime mortgage crisis in America drove the global economy in the state of confusion this summer. But, we should be aware of that this is only a small portion of predicted disaster.
- Why America?
America is now staring at a nasty housing crash. But, something is strange in here. There are numerous frothy housing markets in many developed countries such as Britain, Australia, or Spain. Compared to those countries, the price increase in American market was moderate. If America¡¯s housing market was less puffed up, why is it alone bursting?
It can be said that the American market was seen to be less bubbled since America is a huge country.(Houses, Economist) Comparing the entire of market in America, including slow-growing rural areas, with those of developed countries is absolutely unfair.
But, what really enraged the dormant housing bubble in America was a time-bomb laid by subprime mortgage lending. The way many of these deals were structured gave homebuyers with tarnished credit records a free option on house prices. Dangerously loose lending standards fuelled America¡¯s housing boom and now the fallout from increasing defaults is exacerbating the bust. Prices are falling and more forced sales will add to the already swollen stocks of unsold homes.(Houses, Economist)
5. Outlook for the Future
- Propositions by U.S.
In order to revive the depressed market, the federal bank in the U.S. lowered the interest rates. It seemed to be effective; the world economy shocked by the subprime mortgage crisis started to revitalize. However, lowering interest rates cannot be the ultimate solution. Bernanky, the head of the federal bank, himself once paralleled lowering interest rates to refresh economy with a brain surgery with an iron hammer. Lowering interest rates has a high risk of inflation, making the solution only temporary. The inflation in the U.S. economy can have a destructive effect in the global economy; devalued dollars and increased raw material prices will drive people into the state of confusion.(Even the oil price is surging recently.) The resolution held by the U.S. doesn¡¯t really seem to have a positive outcome.
- Slight hope for Asia
People tend to ignore good news, overwhelmed by the shock of the bad news. However, we should not ignore the hope of Asia, even in the middle of the gloomy picture for the housing boom.
The most perfect example is China. The average house prices have risen by 30% in china since 2002. In a developed economy, double-digit annual price gains would indeed look bubbly, but not in an economy where nominal GDP is growing at a rate of 14%. Plus, in China, average nationwide house prices have risen much more slowly than the real incomes, different from America or European countries with high ratio of house prices to income. A Canadian financial-research firm concluded that China is substantially ¡°undervalued.¡±(Home, Economist)
And this is not only restricted in China. This graph shows the health of housing market in Asian countries; since 1999, house prices have risen more slowly than income in South Korea, Thailand and Hong Kong as well as China.(Home, Economist) Another positive fact is that the Asian home buyers, having seen the tragic outcome of housing bubble in late 1990s, are more reluctant to borrow money for their houses. In contrast to America, suffering from subprime lenders, Asian countries have much less possibility for the property market to suddenly plunge.
The Asian countries cannot endlessly smile, though. The economy in many of these countries is heavily relying on the exports to America or European countries. If the global housing bubble hits the economies in there, unavoidably Asia has to suffer with others. There is no time to freely assure. Even though, nobody can deny that the freedom from the danger of the housing bubble is a huge power for the Asian countries.
- Still Unfinished
As many pundits have warned, the global economy faced sour suffering from the busts in American housing bubble. However, this is only the beginning of the problem. Remember the suggested consequences above? We haven¡¯t actually been through it all. See the outcome of the Japanese estate bubble. The recession from it had lasted more than a decade.
With the decrease of interest rates by Fed, the once volatile economies seem to soothe. However, the general expectation is a little different. On September 25th, International Monetary Fund predicted the protracted credit market corrections and slow global economic growth. Also, it mentioned that failing subprime loans will likely continue to be a problem ¡°at least through 2008¡± as low introductory ¡°teaser¡± rates rest to higher rates.(Associated Press, International Herald Tribune)
The world seems to suffer more from their reckless borrowing and investments on housings.
Works Cited
Associated Press. ¡°International monetary fund predicts ¡®protracted¡¯ credit market correction, slow global growth.¡± International Herald Tribune 25 Sep. 2007
¡°Houses built on sand.¡± Economist 13 Sep. 2007
¡°Abandon ship.¡± Economist 2 Aug. 2007
¡°Home truths¡±. Economist 5 Jul. 2007
¡°Bubble and Squeak.¡± Economist 7 Dec. 2006
Fackler, Martin. ¡°Take it from Japan: bubbles hurt¡± New York Times 25 Dec. 2005
¡°Hear that hissing sound?¡± Economist 8 Dec. 2005
¡°In come the waves.¡± Economist 16 Jun. 2005
¡°After the fall.¡± Economist 16 Jun. 2005
¡°Will the walls come falling down?¡± Economist 20 Apr. 2005
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