Recently I have indicated I see a lot of problems in asset markets despite the economic acceleration in Europe, Japan, and the US. Commercial real estate is a problem that I want to highlight briefly since I believe it will be a locus of distress in the next global downturn.
I don’t know if there is a German housing bubble or even whether there will be one. I do know that we hear a lot about it in the press – the result of zero, even negative, interest rates. So let me give you a little anecdote from my trip to Germany last week.
This is going to be a quick hit post to get some thoughts down on paper because a few threads are coalescing for me that I want to give some coherence to. The essence of the threads revolves around the tension at the Fed between normalizing policy and the ability of the economy to withstand it. My view has been upbeat about the US economy – and that’s been without a trace of recession worry for the last several months. But there are some negative factors coming together that give me pause. And it begins with housing.
Between the first quarter of 2013 and the end of 2015, London property prices rose rapidly, the exchange rate appreciated, and the current account deficit widened. This column argues that the rise of the pound was in fact a financial bubble, riding on a property price-exchange rate carry trade.This unsustainable bubble was deflated by Brexit.
No one story sticks out for me today. So I thought I would make a few comments on the stories making the rounds today in the Internet. Let’s start in the U.S.
A couple of weeks ago I told you about two properties in London that I was familiar with as background for my post on house price inflation in the UK. What was clear from those two examples and dozens of others I found is that rental yields are extremely low […]
Yesterday, I saw a couple of stories about a sell off in luxury flats in London. The gist was that luxury homes in central London had corrected as much as 20% in the last year. The decline is severe and Foxtons, the estate agent, has been hurt by this according […]
For years mortgage rates on “jumbo” loans have been higher than for traditional (conforming) mortgages. Since jumbo loans were larger than the upper limit permitted to be packaged and sold to Fannie and Freddie, banks would typically charge a premium for “illiquidity” on these products. But starting last year conforming mortgages became more expensive for borrowers than jumbo loans.
According to S&P’s Case-Shiler House Price Index, house prices are up on average 12% since 2003. The chart of the path of house prices during that time is below via the New York Times.
Drawing on research by the IMF’s Hites Ahir and Prakash Loungani, the chart compares the house-price-to-rent ratio compared with the historical average. This is a standard measure of valuation. Clearly by such a metric, the recovery in the housing market has been uneven. Canada has the dubious honor of having the most over-valued houses, or where it makes the most sense to rent. The current ratio is about 85% above the average.
The recent increase in long-term rates is causing major changes in the mortgage markets. Here are some key trends
While the US housing market remains relatively robust, it is likely to face a couple of headwinds going forward. One is the lower affordability index. The other is the recent slowdown in net household formation.