There's a rental bubble in San Francisco

Real estate bubble - Real estate bubble

A Real estate bubble or Real estate bubble (or Real estate bubble for residential real estate markets) is a type of economic bubble that occurs regularly in local or global real estate markets and typically one Country boom follows. A land boom is the rapid rise in the market price of real estate, such as residential property, until it reaches unsustainable levels and then falls. This length of time leading up to the crash is also called Called foam . The questions of whether real estate bubbles can be identified and prevented, and whether they have broader macroeconomic implications, are answered differently by schools of economic thought, as outlined below.

Bubbles in the real estate markets are more critical than stock market bubbles. Historically, stock price breaks occur on average every 13 years, last 2.5 years, and result in a GDP loss of around 4 percent. Breakouts in real estate prices are less common, but last almost twice as long and lead to production losses that are twice as high (IMF World Economic Outlook, 2003). A recent experimental laboratory study also shows that real estate markets have longer boom and bust periods compared to financial markets. Prices fall more slowly because the real estate market is less liquid.

The 2007-2008 financial crisis was associated with the bursting of real estate bubbles that had started in various countries in the 2000s.

Identification and prevention

Ratio of median real estate prices in Melbourne to Australian annual wages from 1965 to 2010

As with all types of economic bubbles, there is disagreement as to whether a housing bubble can be identified or predicted and then possibly prevented. Speculative bubbles are persistent, systematic, and increasing deviations in actual prices from their base values. Real estate bubbles can be difficult to identify even when they occur, in part because of the difficulty in realizing the intrinsic value of real estate. As with other medium- and long-term economic trends, predicting future bubbles accurately has proven difficult.

For real estate, fundamentals can be estimated based on rental returns (where real estate is then viewed in a manner similar to stocks and other financial assets) or based on a regression of actual prices using a range of demand and / or supply variables.

American economist Robert Shiller of the Case-Shiller House Price Index of house prices in 20 metro cities in the United States stated on May 31, 2011 that a “Home Price Double Dip [is] Confirmed” and the British magazine The Economist, argues that housing market indicators can be used to identify housing bubbles. Some go on to argue that governments and central banks can and should take action to prevent bubbles from forming or to deflate existing bubbles.

Macroeconomic importance

In the mainstream economy, economic bubbles, and property bubbles in particular, are not viewed as a major concern. On the other hand, in some schools of the heterodox economy, real estate bubbles are seen as a crucial and fundamental cause of financial crises and the resulting economic crises.

The prevailing economic perspective is that an increase in house prices has little or no welfare effect, ie does not affect the consumer behavior of households that do not want to sell. The house price is used to compensate for the higher implicit rental costs of owning the property. Rising real estate prices can have a negative impact on consumption due to increased rental inflation and a greater propensity to save in view of the expected increase in rents.

In some schools of heterodox economics, particularly the Austrian and post-Keynesian economies, property bubbles are viewed as an example of credit bubbles (pejorative speculative bubbles), as property owners generally use borrowed money to purchase property in the form of mortgages. These should then cause financial and thus economic crises. This is initially argued empirically - numerous property bubbles have been followed by economic slumps, and it is argued that there is a cause-and-effect relationship between them.

The post-Keynesian theory of debt deflation takes a demand-side view, arguing that real estate owners not only feel richer, but borrow (i) consume against the increased value of their property - by withdrawing a home equity line of credit, for example ;; or (ii) speculate by buying real estate with money borrowed in anticipation of its appreciation. When the bubble bursts, the value of the property goes down, but not the debt. The burden of repayment or default on the loan, it is argued, depresses aggregate demand and is the immediate cause of the subsequent economic slump.

Real estate market indicators

UK house prices between 1975 and 2006, adjusted for inflation
Robert Shiller's illustration of US home prices, population, construction costs, and bond yields Irrational Exuberance , 2nd ed. Shiller shows that US inflation-adjusted house prices increased 0.4% per year from 1890 to 2004 and 0.7% per year from 1940 to 2004, while US census data shows 1940-2004 that the self-rated value has increased by 2% per year.

In an attempt to identify bubbles before they burst, economists have developed a number of financial metrics and economic indicators that can be used to gauge whether homes in a given area are fair value. By comparing current levels with previous levels that have not proven sustainable in the past ( ie led to, or at least accompanied, crashes), one can make an educated guess as to whether a bubble is occurring in a particular property market. Indicators describe two interrelated aspects of the housing bubble: a valuation component and a debt (or leverage) component. The valuation component measures how expensive houses are relative to what most people can afford, and the debt component measures how highly indebted households become if they buy them for home or for profit (and how much exposure the banks lend to build them up). A basic summary of the progress of housing indicators for US cities is provided by the Business Week . See also: Real Estate Economics and Real Estate Trends.

Measures to make housing affordable

  • The Price-performance ratio is the basic measure of the affordability of housing in a given area. This is generally the ratio of median house prices to median family disposable income, expressed as a percentage or as an income year. It is sometimes compiled separately for first-time buyers and as a Called accessibility . This ratio, applied to individuals, is a fundamental part of making mortgage loan decisions. According to a back-of-the-envelope calculation by Goldman Sachs, comparing median house prices to median household income suggests that US real estate was 10% overvalued in 2005. "However, this estimate is based on an average mortgage rate of about 6% and we expect interest rates to rise," the company's business team wrote in a recently released report. According to Goldman, a one percentage point increase in mortgage rates would lower the fair value of house prices by 8%.
  • The Ratio of deposits to income is the minimum down payment required for a typical mortgage, expressed in months or years of income. This is especially important for first time buyers with no existing home equity. If the down payment gets too high, these buyers may be "priced out" by the market. For example, as of 2004, this ratio was equivalent to one income year in Great Britain.
    The US National Association of Realtors calls another variant in its publications the "Index for the affordability of housing". (The soundness of the NAR methodology has been questioned by some analysts as it does not take inflation into account. However, other analysts consider the measure appropriate as both income and housing cost data are expressed in terms that include inflation and all in all the same, the index implicitly includes inflation).
  • The Affordability index measures the ratio of the actual monthly mortgage cost to takeaway income. It is more commonly used in the UK, where almost all mortgages are variable and tied to bank loan interest rates. It offers a much more realistic measure of households' ability to afford housing than the ratio of the price of crude oil to income. However, it is more difficult to calculate, and therefore value for money is still used more widely by experts. In recent years, lending practices have relaxed so that a greater multiple of income can be borrowed.
  • The mean multiple measures the ratio of the median house price to the median annual household income. This measure has historically hovered around 3.0 or less, but has increased dramatically in recent years, especially in markets with severe public policy restrictions on land and development.
Inflation-adjusted house prices in Japan (1980-2005) compared to the appreciation of house prices in the USA, Great Britain and Australia (1995-2005)

Measures for the indebtedness of residential real estate

  • The ratio of housing debts to income or Debt service is the ratio of mortgage payments to disposable income. If the rate gets too high, households will increasingly rely on rising property values ​​to service their debts. A variant of this indicator measures total home ownership costs, including mortgage payments, utilities, and property taxes, as a percentage of a typical household's monthly pre-tax income. See, for example, the RBC Economics reports for the Canadian markets.
  • The Ratio of housing debt to equity (not to be confused with corporate debt to equity ratio), also called loan to value, is the ratio of mortgage debt to the value of the underlying property. It measures financial leverage. This ratio increases when the homeowner takes out a second mortgage or home equity loan with the accumulated equity as collateral. A ratio greater than 1 means the owner's equity is negative.

Home ownership and rental measures

  • Bubbles can be found when a rise in house prices is greater than the rise in rents. In the US, rent increased steadily by about 3% per year between 1984 and 2013, while house prices increased 6% per year between 1997 and 2002. Between 2011 and the third quarter of 2013, house prices rose by 5.83% and rents by 2%.
  • The Ownership rate is the percentage of households owning their homes as opposed to renting them. It tends to rise steadily with income. In addition, governments often take measures such as tax cuts or subsidized financing to encourage and facilitate home ownership. Unless a surge in property is backed by a surge in income, it can mean buyers either benefiting from low interest rates (which eventually have to rise again when the economy warms) or that home loans are made more generously to borrowers with bad credit. Therefore, a high ownership rate combined with an increased subprime credit rate can signal higher bubble-related debt levels.
  • The Price / earnings ratio or P / E ratio is the common metric used to assess the relative valuation of stocks. To calculate the P / E ratio in the case of a house rented, divide the price of the house by its potential income, or net income, that is, the annual market rent of the house minus costs, including maintenance and property taxes. This formula is:
The home's value for money provides a head-to-head comparison with the P / E ratio, which is used to analyze other uses of the money tied up in a home. Compare this ratio with the simpler but less accurate one Price-rent ratio below.
  • The Price-rent ratio is the average operating costs divided by the rental income received (when buying to rent) or the estimated rent (when buying to live):
The latter is often measured using "owner's equivalent rent" figures published by the Bureau of Labor Statistics. It can be viewed as the real estate equivalent of the price / earnings ratio of the stocks. In other words, it measures how much the buyer pays for each dollar of rental income received (or for the dollar saved on rental expenses). Rents, like business and personal incomes in general, are very closely related to the fundamentals of supply and demand. one rarely sees an unsustainable "rent bubble" (or "income bubble"). A rapid rise in property prices coupled with a home rental market can therefore signal the start of a bubble. The US price-to-rent ratio in October 2004 was 18% above the long-term average.
  • The Gross Rental Return , a measure used in the UK, is gross annual rental rent divided by property price and expressed as a percentage:
This is the reciprocal of the house price-to-rent ratio. The Net rental return subtracts the landlord's cost (and sometimes the estimated rent gaps) from the gross rent before doing the above calculation. This is the reciprocal of the house's P / E ratio.
Since rents come in all year round and not at the end of the year, both gross and net rental returns are slightly below the actual rental returns that are achieved taking into account the monthly nature of the rental payments.
  • The Occupancy rate (Opposite: Vacancy rate ) is the number of occupied housing units divided by the total number of units in a given region (for commercial property, usually expressed as area (i.e. in square meters, acres, etc.)). for different building classes). Low occupancy means that the market is in oversupply caused by speculative building and buying. In this context, supply and demand can be misleading: sales demand exceeds supply, but rental demand does not.

Property price indices

The Case-Shiller Index 1890–2016 shows a real estate bubble that peaked in 2006

activities House price are also used in the identification of real estate bubbles; these are known as property price indices (HPIs).

A well-known series of HPIs for the USA are the Case-Shiller indices, which were developed by the American economists Karl Case, Robert J. Shiller and Allan Weiss. As measured by the Case-Shiller index, the US recorded a peak in its housing bubble in the second quarter of 2006 (second quarter of 2006).

Current real estate bubbles

The collapse of the Japanese asset price bubble from 1990 onwards severely damaged the Japanese economy. The 2005 crash affected Shanghai, China's largest city.

As of 2007, there have been real estate bubbles in the recent past that were widely believed to still exist in many parts of the world. including Argentina, New Zealand, Ireland, Spain, Lebanon, Poland and Croatia. Then, in mid-2005, Federal Reserve Chairman Alan Greenspan said, "At least there is a little 'scum' (in the US housing market) ... it's hard not to see that there are a lot of local bubbles." The one that writes at the same time Economist Magazine went further and said, "The global rise in house prices is the biggest bubble in history."

In France, the economist Jacques Friggit publishes a study every year with the title "Development of the price, value and number of property sales in France since the 19th century", which shows a sharp rise in prices since 2001. Nevertheless, there is a real estate bubble in France is being discussed by economists. Real estate bubbles are always followed by sharp price drops (also known as House price crash ) that can result in many home owners holding mortgages that exceed the value of their homes. As of December 31, 2010, 11.1 million residential properties or 23.1% of all US properties were in negative equity. Commercial property values ​​remained around 35% below their mid-2007 peak in the UK. As a result, banks are less willing to hold large amounts of property-backed debt, which is likely a key problem affecting the global recovery in the short term.

By 2006, most areas of the world were in a bubble state, although this hypothesis, which was based on the observation of similar patterns in the real estate markets of a variety of countries, has been controversial. These patterns include overvaluation and, more broadly, excessive borrowing due to these overvaluations. The 2007-2010 US subprime mortgage crisis, along with its impact and impact on economies in different countries, implied that these trends might share some common characteristics.

For individual countries see:

US housing bubble 2012 - present

The Author of the Washington Post, Lisa Sturtevant, believes the 2013 real estate market was not indicative of a real estate bubble. "A key difference between the current market and the overheated market in the middle of the last decade is the nature of the mortgage market. Stricter underwriting standards have limited the pool of potential homebuyers to those who are best qualified and most likely to pay back loans. Demand is based this time around more on market fundamentals. And the price growth we've been seeing lately is "real" or "more real." "Other recent research shows that mid-sized securitized finance managers are unaware of problems across the real estate markets showed.

Economist David Stockman believes that a second real estate bubble started in 2012 and is still inflating from February 2013. The housing stock began to shrink from early 2012 when hedge fund investors and private equity firms bought single-family homes to rent while awaiting a housing boom. Due to the guidelines of QE3, mortgage rates were at an all-time low, causing real estate values ​​to rise. In metropolitan areas like the San Francisco Bay Area and Las Vegas, property prices have increased unnaturally by up to 25% in a year.

See also


further reading

  • John Calverley (2004), Bubbles and how to survive them , N. Brealey. ISBN 1-85788-348-9
  • Robert J. Shiller (2005). Irrational exuberance , 2nd ed. Princeton University Press. ISBN 0-691-12335-7.
  • John R. Talbott (2003). The impending crash in the housing market in New York: McGraw-Hill, Inc. ISBN 0-07-142220-X.
  • Andrew Tobias (2005). The only investment guide you'll ever need (updated edition), Harcourt Brace and Company. ISBN 0-15-602963-4.
  • Eric Tyson (2003). Personal finance for dummies , 4th Edition, Foster City, CA: IDG Books. ISBN 0-7645-2590-5.
  • Burton G. Malkiel (2003). The Random Walk Guide To Investing: Ten Rules For Financial Success , New York: WW Norton and Company, Inc. ISBN 0-393-05854-9.
  • Elizabeth Warren and Amelia Warren Tyagi (2003). The two-income trap: why bourgeois mothers and fathers go broke , New York: Basic Books. ISBN 0-465-09082-6.