Real Estate boom
A few years back, as the world economy looked bleak, most countries cut interest rates drastically to keep the industry motivated. The analysts' perception was interest savings would increase corporate profits to an extent that would reduce the risk of a economic tail spin.
However something interesting happened. Lower interest rates led to a real estate boom from America and Britain to Australia and France, and the common man's dream of owning a home became a reality. It is estimated that this real estate boom generated 700,000 jobs in US alone, whereas other sectors have lost 400,000 jobs during the last four years, according to an analysis by research firm economy.com.
Real estate prices have sky rocketed with a few places appreciating over a 100%, putting the dotcom boom to shame. Speculation is rife and has reached disproptionate levels — with the consequence that homes are being traded extensively on paper.
The features of these mortgages which allow the borrower to pay only the interest for extended periods are inherently risky. One-fourth of home buyers made no down payment in 2004, according to the National Association of Realtors. Nearly a third of all mortgages this year are interest-only payments, according to Loan Performance, a mortgage data firm.
Federal Reserve Chairman Alan Greenspan acknowledged concerns over the “froth” in the market and admitted to a “lot of local bubbles” caused by speculation. Obviously governments the world over are being cautious and inducing precautions, but ultimately it’s the risk appetite of the individual that needs to be contained.
The available indicators aren’t encouraging either, Britain and Australian prices are looking southwards it wont take long for the US prices to synchronize, thereby leading to a bust in real estate worldwide.
About 40% of housing booms in rich countries over the last three decades have ended in busts, according to a recent study by the International Monetary Fund. Busts almost inevitably led to recessions; the study also found that output losses after house-price busts in rich countries have on an average been twice as large as those after stockmarket crashes.
Japan provides a nasty warning of what can happen when boom turns to bust. Japanese property prices have dropped for 14 years in a row, by 40% from their peak in 1991. Yet the rise in prices in Japan during the decade before 1991 was less than the increase over the past ten years in most of the countries that have experienced housing booms.
According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.
Participating in the present boom may not be a wise thing to do; real estate is brittle and waiting for the proverbial last straw that will break the camel's back.
As a friend of mine said: “Rising confidence which arrogantly defies gravity is the surest sign that the bubble will burst."
However something interesting happened. Lower interest rates led to a real estate boom from America and Britain to Australia and France, and the common man's dream of owning a home became a reality. It is estimated that this real estate boom generated 700,000 jobs in US alone, whereas other sectors have lost 400,000 jobs during the last four years, according to an analysis by research firm economy.com.
Real estate prices have sky rocketed with a few places appreciating over a 100%, putting the dotcom boom to shame. Speculation is rife and has reached disproptionate levels — with the consequence that homes are being traded extensively on paper.
The features of these mortgages which allow the borrower to pay only the interest for extended periods are inherently risky. One-fourth of home buyers made no down payment in 2004, according to the National Association of Realtors. Nearly a third of all mortgages this year are interest-only payments, according to Loan Performance, a mortgage data firm.
Federal Reserve Chairman Alan Greenspan acknowledged concerns over the “froth” in the market and admitted to a “lot of local bubbles” caused by speculation. Obviously governments the world over are being cautious and inducing precautions, but ultimately it’s the risk appetite of the individual that needs to be contained.
The available indicators aren’t encouraging either, Britain and Australian prices are looking southwards it wont take long for the US prices to synchronize, thereby leading to a bust in real estate worldwide.
About 40% of housing booms in rich countries over the last three decades have ended in busts, according to a recent study by the International Monetary Fund. Busts almost inevitably led to recessions; the study also found that output losses after house-price busts in rich countries have on an average been twice as large as those after stockmarket crashes.
Japan provides a nasty warning of what can happen when boom turns to bust. Japanese property prices have dropped for 14 years in a row, by 40% from their peak in 1991. Yet the rise in prices in Japan during the decade before 1991 was less than the increase over the past ten years in most of the countries that have experienced housing booms.
According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.
Participating in the present boom may not be a wise thing to do; real estate is brittle and waiting for the proverbial last straw that will break the camel's back.
As a friend of mine said: “Rising confidence which arrogantly defies gravity is the surest sign that the bubble will burst."
posted by Manzoor at 1:23 PM
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