Housing Bubbles A Global Problem

Housing bubbles are easy to see, unless of course you are one those people in the real estate industry who feign ignorance for the sake of sales. For those who care to look, it is blatantly obvious that there is an echo bubble in real estate prices. It’s a global problem that poses a number of challenges, and the potential capital destruction that would result from its collapse is probably larger than many want to admit. Everyone has to dance to the music, until the music stops.

Looking at an updated index of San Francisco home prices, the reflation of the housing bubble in the U.S. is easy to see. Home price in the Bay Area are now well above the previous “bubble’ level peak.

¬†Ditto for home prices in Dallas Texas…

While Case-Shiller does not break out Houston home prices, we do have another source for that price index…

housing bubbles

Texas home prices have experienced an impressive echo bubble following the Fed’s market interventions. Houston is no exception. The only thing that is surprising is how many people in the Bayou City are still in denial that Houston home prices are in bubble territory.

housing bubbles

Housing bubbles are now a global problem with potentially disastrous consequences. Housing markets in Canada and Australia are bugs looking for a windshield. China’s overly real estate-dependent economy is equally fragile. From London To Stockholm to Beijing, speculation has taken home prices to new heights, most of which has been driven by central bank liquidity and the temporary suspension of price discovery.

The National Bank of Canada just issued an eye-opening report on what would happen to the payments on homes if mortgage interest rates were to rise just one full percentage point (100 basis points). The results of the latest Canadian affordability problem show that the monthly mortgage payments for homes in Vancouver and Toronto would jump dramatically, rising C$388 per month in Vancouver and C$239 in Toronto. That represents increases of 9 percent and 7 percent respectively on just a 100 basis point interest rate hike!

Unlike the previous U.S. bubble where the mania was easy to spot and confined to a specific segment of the market (subprime mortgages), there are now multiple potential catalysts in multiple countries that could pop the new global housing bubble. When real price discovery rears it’s ugly head again, things are going to get very interesting.

The Fed has been enabling Congressional malfeasance for years, and the consequences are knocking on the door. The Fed and other central banks have been working overtime to prevent real price discovery, blowing the bubbles larger and larger as they kick the can down the road.

“It is the citizens of this country that will ultimately pay the price.”

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