ABN Fears World Housing Crash; UK Housing Overvalued by 50%
June 13th, 2007Via: This is Money UK:
Soaring borrowing costs could spark a housing slump on a ‘global scale’, investment bank ABN Amro has warned.
Families have taken on ‘unsustainably large’ mortgages, leaving them vulnerable to the sharp increases in bond yields and official interest rates seen in recent weeks, wrote economist Dominic White.
Britain is one of the most exposed markets thanks to rampant speculation over the past decade, though it is by no means alone.
Claims that shortfalls in the supply of new homes will lead to an inexorable rise in UK property prices in coming decades have ‘as much credibility as Britney Spears’ latest comeback,’ he wrote.
‘The decline in global interest rates has now been largely reversed,’ White said. ‘Rising real interest rates could result in greater economic volatility. I believe this leaves housing markets vulnerable to a correction on a global scale.’
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Central banks have raised interest rates to the highest level since 2001 across the 30 members of the Organisation for Economic Cooperation and Development.
Meanwhile yields on government bonds – a key measure for the cost of borrowing – have increased in recent days, sending shockwaves through financial markets.
Although fears for the health of the US housing market have captured headlines, the degree of over-valuation is more ‘severe’ in Britain, Australia, Spain and Ireland, ABN Amro calculates.
A note by the bank in April found that UK residential property is 50% overvalued, whereas US houses are 25% too expensive.
My own house purportedly went up in “value” by at least twenty percent from last year and the only thing thats happened in my neighborhood is the house across the street where my neighbors of thirty years has sold. And that rose the rates? What the hell!
Its absolutely crazy. From what I’ve read the problems are heavy in New Zealand as well. House prices are ridiculous and you can see reports time and again where people are moaning about the fact they can’t afford one. I’d sit tight because the ship is about to hit the reefs and that “problem” is going to correct itself.
Its clear here in the States that the market is already winding down but from all the noise from the bands of realtors on deck you’d think it was still party time. They’ll keep singing until they get sucked under.
Yep. NZ, Aussie, Ireland, all doomed in this respect. We paid cash for our property. We refused to play that loan game. It’s nice not having to worry about that.
My father, who plays the real estate game pretty well, keeps telling me that this won’t and can’t happen in Australia: “house prices will NEVER come down – they may stabilise, but only for a while before they shoot back up again…” I guess that’s all he’s ever seen in his lifetime – growth (of course there were some temporary recessions here and there.) Nearly everyone I know seems to cling to the belief that property prices, no matter the location, will only ever go up, and ridiculously at that. I think they are about to see otherwise…
house prices in Japan went down 80% in the 1993-2003 decade. ouch.
but hey, look on the bright side!
it gave birth to the yen carry trade 🙂
I do not have any opinion about what nominal house prices might do. That all depends on the rate of inflation of the monetary supply. I am sure that nominal house prices in local currency are still rising rapidly in Zimbabwe, yahoo!
What I can say with absolute certainty is that the ratio of housing prices to median income (or to gold) will revert to the long term historical means – and beyond – before rising again. Not only that, but this long drawn out process will take 15 – 20 years, just like it did after 1929 in the US and after 1989 in Japan.
So how overvalued is NZ suburban residential housing?
By historical ratios to median income it is 100% overvalued
By historical comparison with gold it is 200% overvalued.
When I lived in Japan in the 80’s there were “generational mortgages” up to 99 years! The insanity of it all. The bust took out all the land speculators who were building this mysterious “wealth” merely because the land value kept going up. The land often times was worth more than the structure sitting on it. It was after the bust that we know of people who purchased a large property for a new school up in Hokaido. Something they never would have been able to do during the GO GO days. What I remember clearly is that folks, especially those who were playing the market and real estate, refused to believe that things were sinking even while it was happening right before their eyes. Sound any different today? Nope. Didn’t think so. People don’t want to believe in the worst otherwise they will not take on the risk.