Housing boom and bust lesson still not sinking in
What is most striking about the latest round, at least when you listen to those who ought to know, is how nothing much except the price has changed.
We were told a stern lesson in the months and years after the financial crisis, borne out of an over-inflated, over-leveraged U.S. housing market securitised up to the scalp by Wall Street and leaping ever higher up a steeper incline on a blind instinct never to look back.
But as most school teachers know, sometimes a lesson has to be repeated in order to be properly learned. And some students will still fail.
Scanning through the results of the latest Reuters surveys of property market analysts and economists would leave any reader with a memory stretching back before 2008 with a sense of déjà vu.
After all, interest rates are even lower, stock markets are soaring to record highs, and a rapid expansion in household debt in all three countries is driving the property market higher, leading what one economist in Britain, lamenting poor trade performance, has called the “estate agent-led” recovery.
In the U.S., David Crowe, economist at the National Association of Housebuilders argues that the biggest threat to a stomping housing market recovery there is not an eventual end to purchases of Mortgage-Backed Securities by the Federal Reserve. Until recently at least, those purchases, along with zero rate policy, have kept mortgage rates firmly pinned down. Nor is it the threat of an economic slowdown or poor job growth.
The biggest threat to the recovery would be a heavy-handed, ill-considered attempt at GSE reform that derails the secondary mortgage market and greatly reduces the availability of credit to the mortgage markets.
Of course we know that the rapid expansion of Government Sponsored Enterprises like Fannie Mae and Freddie Mac was the gasoline that flared out the highly-leveraged fire-sale of toxic securities based on poor-quality mortgages.
The Great Recession followed.
In Britain, the government has made no apologies for deliberately igniting a fire under the property market, which has been particularly effective in London, with a scheme which, explained to any school student, would seem exactly like the policy that juiced the U.S. property boom, just with a different name.
Even Mark Carney, Governor of the Bank of England, who as Bank of Canada Governor in his previous role presided over the bulk of Canada’s historic property market boom, has made it clear he doesn’t see a problem with a return to double-digit house price inflation in the British capital.
While surveys of the general public in Britain show that most don’t want higher house prices, and know that property booms can’t last forever, it’s much harder to find an analyst who thinks the same way.
Asked if prime London property is an example of an asset price bubble, Ray Boulger, of mortgage broker Jon Charcol said:
No, because it is being driven by different dynamics to the rest of the market and those dynamics don’t look like changing unless the Chancellor (finance minister) imposes swinging tax increases specifically on the sector.
Stephen Lewis of Monument Securities says:
A ‘bubble’ would imply that prices might fall suddenly and steeply, but there seem to be enough international cash purchasers to prevent that happening.
And Peter Dixon, economist at Commerzbank:
If we define a bubble as an unsustainable rise in prices which is likely to correct I suspect that the London prime market is not a bubble. The surge in prices reflects a genuine supply-demand imbalance. Whether this is desirable is, however, another matter because it forces up prices in other regions which may later take on the characteristics of a bubble.
In Canada, which has taken on the dubious title of country in the world with the fastest rate of growth in household debt from the period just before the financial crisis until now, has had barely a pause in its storming housing market. And that was only briefly, after several government attempts to rein it in.
Despite the fact that it has had no correction even while the U.S. market has fallen by more than a third and started to recover, the Canadian market is taking off again. And analysts do not sound worried.
Property analyst Will Dunning says:
The government continues to mis-characterize the housing market as overheated, when it is barely in balance.
If you look at the price indexes… they’re all showing price increases somewhere in the range of 3 percent. A 3 percent price increase is pretty moderate. It’s reasonable. There have been a few places in the country that have been hot lately, particularly Toronto and Vancouver. I think that’s a very short-term response to interest rate changes.
Even those who think there could be a correction cling to wild beliefs, not expressed very clearly, of why this time it would be different.
Dana Peterson at Citi says:
Prices and activity could fall dramatically, but it would not be a U.S.-style, global credit market event since much of the impact could be absorbed by domestic factors.
Of course, as in any panel of people you canvass for opinion, there are those who sound more convinced of a different outcome and who express their view clearly.
Asked the same question about prime London property, independent property market analyst Jonathan Davis had this to say:
If it walks like a duck…Yes. UK housing has been in a bubble for 10 years. All bubbles eventually burst, although with massive political intervention, they can (last) longer than usual.
But those people, as ever, tend to be a minority.