Wednesday, July 25, 2012

Warning for housing bubbles in Britain, Canada and Australia

Dean Baker at Al Jazeera has a clever insight:

The average house price in the UK is now almost 60 per cent higher than in the US. It had been 20 per cent lower in the mid-90s. In Canada, the average house price is more than 70 per cent higher than in the United States. The price of the median house in Australia is more than 225 per cent of the median house price in the United States.

Given that wages in the United States are the same or higher than in all three countries, it is difficult to see how this huge gap in house prices can make sense. Furthermore, since rents have not notably outpaced inflation in any of these countries, it does not appear that the price increases are being driven by the fundamentals of the housing market. If there was a serious shortage of housing we should expect it to be showing up in rents as well.

In short, there is good reason to believe that house prices in these countries will not be sustained anywhere near current levels. All three are likely to see the same sort of house price collapse that has wreaked so much havoc on the US economy. It's impossible to know what the triggering event will be; a rise in interest rates could certainly deflate a bubble quickly.

And not just in the US economy, let's not forget that the Spanish nightmare sits on one of the worst housing bubbles ever.

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