A global view of the housing bubble
McKinsey Posted the following today that is sure to stimulate comments:
Although the current crisis started with the bursting of the US housing bubble, other economies around the world are feeling the effects of their own real-estate booms and busts. From 2000 through 2007, a remarkable run-up in global home prices occurred (see exhibit). But that trend has reversed abruptly. In 2008, the value of US residential real estate fell 10 percent; the global average fared only somewhat better, declining by almost 4 percent. We estimate that falling home prices erased more than $3.4 trillion of household wealth in 2008. And because home prices are slow to correct, the current slide may persist for some time, which could depress global consumption.
http://www.mckinseyquarterly.com/newsletters/chartfocus/2009_10.htm
-YLTNBoomerang
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October 13th, 2009 at 1:47 pm
@VancouverNumber1: Hey move back to Bountiful will ya?!
October 12th, 2009 at 1:12 am
yes, 26 is a small-minded retard
October 11th, 2009 at 11:53 pm
@VancouverNumber1:
So you think anyone who chooses not to have a child is a loser?
October 8th, 2009 at 11:37 pm
28 was me
October 8th, 2009 at 11:35 pm
@pricedoutfornow: Does your friend know that she is legally entitled to her deposit within 15 days after the end of her tenancy (unless, of course, the landlord files for it). After 15 days, the landlord owes her double if she takes him to the RTB. I had to do this with my last landlord. At 15 days, I told him “Pay up now, or I’m taking you to the RTB and getting double back.” My check arrived the next day. Fucking loser asshole landlords
October 8th, 2009 at 11:34 pm
you dont have to buy to live here
next
October 8th, 2009 at 9:43 pm
I think there really is something different about Vancouver that makes people want to give up their lives to live here. That’s what people do by the way. This town has more dogs than little kids because that’s all these homeowning turds can afford. This place is such a shit sty of hopelessness and despair. I do not feel sorry for one of these turds. The women cry over their dog’s dish every night thinking about what a waste their childless marriage is. Stupid greedy losers.
October 8th, 2009 at 9:40 pm
@YTWNBoomerang: Thanks for the post! I’ve changed your handle to YLTNBoomerang, but unless you create a new account your login info has to stay the same. Your posts and comments should show up with the updated handle from now on.
October 8th, 2009 at 9:25 pm
All lines lead to Germany. All arguments aside, just by looking at Vancouver’s line on this chart, it is impossible to escape the conclusion that we are heading for a crash, simply because no other line has been able to sustain exponential growth.
October 8th, 2009 at 8:37 pm
@ #13. Have to agree with #14, why would a bubble be a sign of strength? It’s a product of speculative greed, hype and fear. I grew up in Germany for 30yrs, moved to Vancouver 5 years ago and have to say it’s SHOCKING to see peoples’ behavior here. Even highly educated people buy into the rather obvious RE scheme.
‘Didn’t grama teach you to not believe the hype?’ – Schiller
And yes, renting is not considered inferior to owning in Germany and Switzerland.
October 8th, 2009 at 8:11 pm
19 – it’s not a hope, it’s a certainty.
October 8th, 2009 at 7:34 pm
Hahahaha, looks like Germany and Switzerland decided not to participate in the braindead, greed-induced feeding frenzy. Two level-headed nations.
October 8th, 2009 at 7:07 pm
Anyone know how to change my username to YLTNBoomerang?
October 8th, 2009 at 6:51 pm
@Pinned:
That would be quite interesting to see…exactly HOW much are people paying per month when they buy that modest SFH for $700k? I have heard recently stories of homeowners who are running into trouble with their mortgage payments, one being a friend who moved out of her basement suite and has had a hell of a time getting her damage deposit back from the landlord (he’s pleading poverty, though his house is worth well over $700k)
I can just imagine the carnage when interest rates go up next year. Maybe that’s our only hope, high interest rates eventually weed out those who truly can’t afford to carry that $500k mortage at 7 or 8%. Down prices will go (so we would like to think)
Sigh…so tired of waiting.
October 8th, 2009 at 6:35 pm
According to data I’ve been able to find, the consumer price index from 1977 to today has increased about 3.6 X.
House prices in Vancouver since 1977 have increased abut 13 X.
That means house prices have increased about 3.6 X faster than everything else.
In light of that I would say a 70% correction is not unreasonable.
October 8th, 2009 at 5:35 pm
@asalvari1: You’re looking at a price index for Germany. Valuation requires additional variables like rent, income, historical borrowing costs, etc.
Also keep in mind, the question you are asking is the one I myself am investigating. I want a 30%+ correction and believe conditions are ripe for the slide to resume. The yield analysis just made me curious about the underlying forces that can cause prices to avalanche well below fair value.
The forces include: investor psychology, availability and short-term cost of credit, consumer and Gov’t debt level, unemployment rate, excess supply, etc. It’s impossible to model many of these variables, leaving room for a wide range of correction values. I’ll bet on at least 30% for now.
October 8th, 2009 at 5:19 pm
@More Consultant Hogwash:
Yikes, did they turn you down for an interview or something back in the day?
You may not like the firm or those who work for it, but I don’t see how the presentation of a graph that really serves (at best) as a discussion point can be defined as ‘hogwash’. So you don’t like their other work… what does that have to do with a very basic presentation of indexed housing values form their research unit? They show a graph with a (mostly) global run-up in real estate prices and draw a reasonable conclusion from it. Rant all you want about the firm and its employees, but this is a reasonable graph with a very basic / reasonable argument presented and far from ‘hogwash’.
October 8th, 2009 at 5:04 pm
A chart that I would like to see would be “median real monthly mortgage payment for first time single family home buyer”. What has certainly contibuted to the housing bubble in Vancouver and other parts of Canada have be the increasingly easier financing terms placed on mortgages ie less downpayment required, longer amortization, lower interest rates (which I acknowlege have nowhere to go but up), etc. Real prices certainly appear exceedingly bubbly compared with rents and incomes but I’m not sure they are quite as out of whack as the stats may indicate if you were to look at what people are paying monthly.
October 8th, 2009 at 5:04 pm
@Garth:
Strong = no housing bubble (Jesse Owens)
Weak = housing bubble (Ben Johnson)
In addition to what previous posters said about Germany’s speculation tax and effects of reunification, there are also two more important factors:
- Mortgage lending is very strict in Germany
- Germans do not have a cultural bias towards ownership and will not pay more to buy than to rent
Put it all together and you have a country that is virtually bubble-proof. Instead of basing the economy on borrowing money and building houses that nobody needed, Germany based theirs on exports (#2 in the world) and saving.
How boring.
October 8th, 2009 at 4:54 pm
Excellent graph. It would be even better if we could see it with the starting point at different years, e.g. 2000 instead of 1970.
Germany was a surprise. I knew that reunification was problematic, but otherwise I thought they were very strong.
October 8th, 2009 at 4:31 pm
More ridiculous hogwash from a consulting firm like McKinsey, loaded with supposed brainiac MBAs from big name B-Schools. Look at how these types worked out for Wall Street.
If anything, maybe we should get contrarian on their ass. Why didn’t McKinsey advise its Fortune 100 clients of what was to come? Way to go McKinsey, you overpaid undeserving suit monkeys who feign knowledge in a world on loaded with so much uncertainty and complexity. (And I suppose that goes for most of you fortune tellers too..)
October 8th, 2009 at 4:24 pm
Dream on buddy. Number of people living and investing in Vancouver will continue to go up.
October 8th, 2009 at 4:16 pm
Note from the chart that there is no correlation between population densities of countries, or their degree of development controls, and the amount of real price growth from 1970 to date. Japan, Switzerland, and Germany all have very little developable land per capita (the first two are mostly mountainous and all have strict development controls).
So much for the “running out of land” and “ALR” arguments.
October 8th, 2009 at 3:31 pm
@Wreckonomics:
It would be about the same as Australia – real prices have about tripled since 1970.
http://cuer.sauder.ubc.ca/cma/.....couver.pdf
Note BTW that Australia is the only large country that saw a nationwide bubble, so that’s essentially saying that Vancouver is in the same ballpark as Oz’s big cities.
October 8th, 2009 at 3:24 pm
That’s like saying going off steroids could depress an athlete’s performance.
All countries with housing bubbles have been overconsuming due to the illusion of wealth created. Demand has been borrowed from the future. The longer that housing prices remain inflated the larger the deficit in savings.
The return of RE price to normal valuations is not the problem, but the solution. If the quote is trying to say that the sooner that prices correct the better (which I’m not too sure of), that’s correct.
One more thing – house prices aren’t really “slow to correct” – they are not self-determining. The real problem is that buyers are slow to get real.
October 8th, 2009 at 3:13 pm
Up until 1990 there was very little difference between Japan’s line and Canada’s, then Japan’s begins to correct while ours keeps going up. Japan is still going down and is nearly back to the 100 line, which goes to show that as long as the baseline reading was taken while the market was at stable levels numbers will probably get back there eventually. Which in practical terms means Canada wide losses of about 50% and Vancouver losses of about 70%.
I like this graph, it does a good job of supporting my mid ’80s beginning of the bubble theory.
October 8th, 2009 at 3:10 pm
Drachen,
In Germany, property is exempt of capital gain tax only if held for 10+ years. A flipper has to pay 28-30% of the gain plus some transfer and finance tax. Should we have this in Canada, it would effectively stop the bubble at inception.
October 8th, 2009 at 2:42 pm
And check out the line for Japan. While every other market was going up from 95 – 06 their market fell from 1990 to the present. That’s nearly 20 years of declining prices.
Proof that the hangover from a busting housing bubble can last a LOOOONG time, even with zero percent interest rates.
October 8th, 2009 at 2:22 pm
As I understand it the re-unification of Germany was a bit of a down time psychologically for those in the West, infrastructure and everything in the East was in terrible shape compared to the West and a lot of money was going into bringing some parity to the other side of the wall. This was still going on well into the ’90s so when bubbles were forming elsewhere there wasn’t the same psychological push in Germany. That plus the German tendency to save money rather than spend it didn’t leave much money or psychological buoyancy for the market.
On a side note, it’s good to be a Landlord in Germany, you can charge 3 months rent for a damage deposit and tenant protections are much weaker than here.
October 8th, 2009 at 1:20 pm
Interesting chart, at first I was suprised that Canada was so middle of the pack when it came to the global housing bubble, but then I remembered that the housing market in Vancouver bears little relation to the housing market for the rest if the nation.
It would be interesting to see how the Vancouver market stacks up on this chart, I assume it would be more dramatic than it is for the nation as a whole.
October 8th, 2009 at 1:15 pm
there is something missing here – look at Germany line – it seems undervalued. GG, any comment ?
October 8th, 2009 at 1:11 pm
First!!!