ECB sees rising risk that housing bubble will burst
reuters.com
reuters.com
"With families building up savings during pandemic and increasingly working from home, demand for property is on the rise..."
"Construction cannot keep up with demand and the residential market is especially hot"
"Despite the recovery in residential construction, labour shortages, global supply chain bottlenecks and input price increases are weighing on the construction sector’s ability to expand housing supply, which is putting upward pressure on house prices"
All of those are indicative of a housing shortage, not a bubble. For the bubble to burst, a lot of underutilized housing would need to come onto the market at once, into an environment where demand is dropping. If supply is tightening and demand is expanding, that's a recipe for continued price increases, not drops.
I suspect people are saying "bubble will burst" because it's going up faster than it has in recent memory, but there's nothing special about today's prices. If supply is low and demand is high tomorrow, there's a new price equilibrium that's higher than today.
> With families building up savings during pandemic and increasingly working from home, demand for property is on the rise...
Return to office, taking deferred vacations, etc. winds down the savings.
> labour shortages, global supply chain bottlenecks
won't last forever.
So there's downside demand-side risk and upside supply-side risks, with identical underlying causal triggering conditions (end of pandemic). Oh, and how long can central banks hold off on rate increases?
The risk of a violent crash has less to do with the probability of a rapid post-pandemic renormalization and more to do with the tight causal links between the risks of upside supply and downside demand. Less like "crash will definitely happen" and more like "X_1, ..., X_n all have unknown but likely highly correlated probabilities, so if one happens they all happen and if you get X_1, ..., X_n all at once there'll definitely be a crash"
I think.
Houses were only sold en masse due to a prescribed flowchart: borrower couldnt pay, bank takes house, bank doesnt want actual houses so bank sells house, bank already earned enough on interest to sell house at a loss, bank can also take losses and list property for lower to sell faster, bank found out it couldn't take losses.
This isnt happening right now. The overleverage isnt in real estate. Everyone is looking in the wrong direction just because price go up.
There's a good chance that, in the coming years, labor and materials prices will fall such that builders will start construction on too many homes. But that's a while away. material prices are falling, but they are still elevated. And houses take a while to build -- four months minimum, nine+ more typical. So even if overbuilding started today, there's still a good year or so before that stuff comes on the market.
In these situations, I'm a big believer in contrarian outcomes. Because if a large number of people think some event will occur, then they act in a way which gives them the best outcome should that event occur. The popular trend right now is to speculate a housing collapse. Thus, I think most people are going to put off buying at "elevated" prices for a few years, until it becomes crystal clear that they were wrong.
My prediction: House prices will be like the stock market circa 2016. Everyone will be predicting a collapse "any time now" while prices soar at a crazy pace and continue to do so for a decade.
Price action is sentiment. Words are hot air. People are NOT speculating on a housing collapse. Exactly the opposite.
Prices demonstrate the attitudes of people who are buying houses. I'm concerned with the attitudes of people who are not buying houses. Why aren't they buying houses? Because they think the are going to fall in the near future. Why do I think that? Because this is a popular sentiment expressed by normal people on social media.
Yes, it's wholly unscientific of me to use Reddit and Facebook as a barometer of society, but I'm not a professional economist, just another rando on the internet making bad predictions.
That's fair.
> Why aren't they buying houses?
I think a lot of people are buying.
> Because they think the are going to fall in the near future.
One major reason people with massive hoards of cash aren't buy is uncertainty around WFH. "Where to buy? Depends. Let's see how this whole return to office thing goes..."
> Yes, it's wholly unscientific of me to use Reddit and Facebook as a barometer of society, but I'm not a professional economist, just another rando on the internet making bad predictions.
Aren't we all :)
My experience is that there are a lot of people looking to buy a house, there's just no houses to buy. I bought a house earlier in the year and put an offer in the day it went on the market, and I was still only one of several offers they got that day. I also have a friend who's looking at houses right now and it seems to be basically the same, houses are getting multiple offers and selling within a few days of going on the market, and anything that doesn't sell that fast isn't worth buying.
The good question is probably "Why aren't people selling?", but I'm not sure that's actually the issue. Google suggests at least as many homes will sell this year as last year, which leads me to believe there must be more buyers than normal.
Petite investors. I saw somewhere on another thread speculation that a crash could come from prospective land lords not being able to make their properties affordable. That seems possible.
Is there a reason to assume there are more people attempting this than normal? I would think this is the worst time to attempt that since the prices are so high. You may very well be right, but it feels like we're going full circle since presumably those 'investors' think the prices are going to continue to go up or else they wouldn't be buying...
Oh, another important point: they aren't necessarily buying investment properties! They might be buying their padnemic/wfh home and then not selling their already paid off starter home/condo
How broad is the market relative to society? Could say 3% of people investing tons of money, while 97% are not, create the same result we are seeing today?
One is active, the other passive
The ECB is talking about Germany, France and the Netherlands, where the average home is an apartment in a shared building. Going on anecdata from my surroundings, those take at least two years from project for sale to finished and ready for use.
That coupled with limited place and an already existing housing shortage and growing prices, it will IMHO take much longer than a year for the current shortage to be corrected.
Housing starts aren't necessarily responding to demand, because yeah, nobody wants to over-build and contribute to a default. Plus there are other factors that impact housing starts in most high-cost areas (i.e. availability of land to build on.)
I don't see a pop, yet I'm not certain prices will soar. People will typically shop based on 'what they can afford' and that usually means monthly payment; as rates went low, it was easier to bump up the ask price; the best way to put it is, if rates drop from 4% to 3%, you can finance around 10% more money over 30y with the same overall monthly payment.
I do think there might be some 'bumps' in the road, but ironically, many of the people 'waiting' will probably end up pulling us out of the bumps (or, maybe, causing another surge.) I think overall the most likely scenario is we'll see some periods of paused growth or slight decline.
Worth throwing out there, at least in US the housing market typically cools down a bit over the winter, so take any news of decreases in volume with a grain of salt.
Tract builders target 100 days to complete a home from ground up. The permitting, zoning, and land acquisition is the slowest part, but once all of the paperwork is done, they can pump out entire neighborhoods in a couple years max.
I'd rather be an asset owner than a revolutionary in that case, though, because it's always easier to play defense than offense. The vast majority of non-billionaires can sit tight and not be explicitly targeted, but starving revolutionaries have to fight for survival. Assets can be rebuilt, but death is permanent.
I wouldn't hold my breath on that one - something like 95% of governors are also property investors.
I could believe an argument based on causal links of supply & demand, but I'm skeptical that they'll operate in the direction you suggest. To my eye: remote work was a spring that's been ready to burst since about 2014 but needed the pandemic to catalyze it; we're not going back to offices; home offices are going to become very desirable; savings (in the form of financial assets, at least) are increasing because of inflation; and supply chain bottlenecks are not normalizing anytime soon.
2021-2008 = 13 < 20.
There were a lot geopolitical papers written then about the unipolar world and how we'd reached the end of history and liberal democracy had won. To the extent that people imagined threats to U.S. dominance, they usually envisioned state actors like Russia or China. Few people predicted the rise of international terrorism, widespread state failures, mass migrations, and internal destabilization of states.
There were a fair number of commentators who said that the Internet was a fad and we'd go back to calling up businesses when we got tired of webpages. The dot-com boom was a bona-fide bubble - it burst, severely - and yet it also wasn't. I predicted the Amazon would go out of business in 2001 when their stock was down 90% in a year; it now owns retail, and is worth 50x that.
People wondered how the hell a website for throwing virtual sheep at one another was worth $15B in 2007. It's now worth $942B, and blamed for taking down governments.
We just had a page at the top of HN about someone's 2011 prediction that Bitcoin would fail. It did, for all the reasons they listed, and yet is still worth 20,000x what it was going for then. It's also had some 60-70% declines in that process.
The general lesson I take from these is that life is a whole lot more random and absurd than a lot of people think it is. A lot of people who lose everything in bubbles are right about the direction of the trend (oftentimes on a subconscious level), but wrong about magnitude and timing. I see a lot of people asking whether today's housing situation is like 2008, and to my eye the fundamental forces are nothing alike. But 2005-2008 might have been the bubble before the trend, which sets up the causal forces leading to a genuine housing shortage now.
Or summarized: first things seem impossible, then they seem obvious.
Prices in certain regions will just. keep. going. up. Maybe with dips here or there.
But there's also a lot of speculation happening in down-market junk.
Given current inflation expectations (and reality) the ECB will probably come under a lot of pressure to start raising rates.
The French are already trying to play down inflation to try and avoid the above scenario I'm guessing
https://www.bloomberg.com/news/articles/2021-11-18/don-t-pan...
In a vacuum.
It's cheaper and has been for many years..
The argument is that when interest rates go up, you refinance at a fixed rate while you can afford it, or sell stocks to payoff a larger portion of you morgage.
That strategy certainly has issue, because stocks will probably crash a bit when interest rates go up.
On the flip side, interest rates will go up slowly, so you might be able to refinance to fixed rate -- the hard part is doing this before it's too expensive. As it'll always be more expensive than sticking with your variable rate.
[1] https://www.washingtonpost.com/business/2019/02/14/adjustabl...
It doesn't have to be a lot. It might only require a little underutilized housing to cause a price drop, depending on how inelastic the market is. If that is indeed the case, then the high-price situation would be fairly fragile, and worthy of being called a "bubble", even if it reflects a current shortage.
What there isn't yet is unsold housing.
On a random drive through a residential area, I'll see an occasional vacant lot or house with its lights perpetually off, but the vast majority of houses seem to be actively lived in. By contrast, I know lots of people that want houses but can't afford them. Either they're living with parents, or raising a family in a condo/apartment that's too small for them, or they've got roommates, or they're doubled/tripled up in a unit with extended family. If prices went down, they'd jump at a chance to buy, but they can't make it work right now.
For a bubble to burst, there'd need to be more vacant units being held as investment properties than there are persons/households that are bunking with people they'd rather not be with. I'm unconvinced this is the case; it certainly seems counter to my experience.
What central banks and feds need to think about is, if they raise rates to combat high inflation, will the higher rates induce a coma in the borrowing market, thus overcorrecting the market into a high supply/low demand situation.
While your argument is logically sound, it's not the whole picture
The whole picture is complex. Anyone who predicts it correctly stands to make a lot of money.
So stagflation, with the prices going up but down in real terms.
That seems to be the best case scenario, the way to reduce overinflated asset prices without causing a panic.
And I'm pretty sure central bankers are currently dreaming of pulling this off, but it seems the market is much more aware of inflation than it was in the 70s, so I'm not sure it's more than a dream.
We already have enough housing to house everyone in the US (including the homeless) with ease. Where are we going to draw the line in the name of investment and speculation?
On the one hand it is fundamentally incompatible with making housing affordable and having "housing as a human right". But still, hundreds of millions of people planning their entire lives around this existing model will have a really painful time if there is some kind of sudden shift in this social contract.
That said a driver for housing has been that over time we have had more people with bigger houses. So it has long been a demographic concern that as the Baby Boom retires, and goes to downgrade, we could wind up with a glut on the market. On top of that telecommute has opened up a significant move away from expensive urban areas like San Francisco. Both together mean that some housing markets have nothing to keep them from a severe fall. And if there is a crash, speculators trying to cover their shirts are likely to need to sell housing elsewhere, and the result could be a cascading problem.
House owners are fine with this arrangement, as they get all the benefits and bear none of the costs inherent with excessive land regulations. Non-owners get screwed.
I would propose that outcomes would be significantly better if we stuck to deregulating land use and construction as much as possible and let what people are willing to pay for it dictate construction and land use.
I don't understand. Do you think that politicians wake up and do regulatory capture for fun?
When I say housing as America's primary investment asset is a problem I mean that it is primary driver in how houses are priced. You don't, for example, have the same attitude when it comes to cars. It's understood that cars are a depreciating asset. Imagine the inverse - which you see in some assets like super cars. Can you imagine if people lobbied to have Toyota stop producing Priuses because they did not want to value of their own Prius to go down? You would have government blocking the development of factories in the same way NIMBYs do today.
You don't have this problem in places where housing is not asset, for example Japan (who has already kind of learned this lesson with their own housing bubble). At the end of the day, when an entire generation of people have their entire net worth tied up in their houses, of course they are going to do everything to protect it. Regulatory capture are down stream effects of that - people wouldn't burn political capital on regulatory capture if they weren't gaining anything from it.
Saying de-regulation of land use is a solution completely ignores this reality. Forget deregulation, the bay area has been trying to get areas simply rezoned for multi-family housing. The same people who stand in the way of rezoning, will also stand in the way of deregulation. And those same people are primarily motivated to protect their investment. You must look at the whole picture.
Houses are still assets in Japan, but they are much cheaper because of Japan's very loose zoning regulations.
If we want to address this in the West, practically speaking higher levels of government need to override local government zoning regulations (ie. governments less beholden to the interests of the local few at the expense of everyone else)
Housing prices do not have to go up for them to be a good investment for the person living in the house. If a homeowner can sell the house for the same price they got in at, then they have lived rent free. Even if they lose the interest on their mortgage, that's still likely to be a better deal than renting.
Back then deducting your interest from your taxes was very important. The middle class could hardly afford to live in a tiny apartment, but the interest tax deduction meant they could afford to live in a good sized house. Back then you bought a house with the understanding that in 30 years it would be paid for - right about the time you were ready to retire, and then you lived rent free for the rest of your life (nobody considered nursing home expenses).
Today housing as an investment to most people mean do a cash out refinance every few years so they can live beyond their means, then sell to some bigger sucker when they are done.
If you think of housing as the first type of investment it can still be good in some cases. You need less money when you are retired and can live a long life in the place where you made your memories.
Of course when talking about investing in housing it must be repeated "location location location". For some of you your location (and in particular change of location over time!) means buying a a bad investment. For others your location means buying is great. You have to figure this out for yourself.
60 years ago had much higher inflation as well. People are scoffing at 6% inflation during this dramatic COVID19 period... but 1974 had 11% inflation, and 1980 had 13.50% inflation.
Under such a market, you had to have higher interest rates. After all, 10% interest rates would _LOSE_ money under real terms in 1974, 1979 and 1980 (all three years famous for having "double-digit" inflation rates).
When banks are charging maybe 15% or 20% for mortgages, housing prices necessarily have to plummet to make those houses affordable to the masses.
Because 1991 is well remembered for...inflation.
Though a house as a real good. Is an investment against inflation which is sometimes more important than others.
Because of how mortgages are amortized, the deduction's value to the taxpayer doesn't vary directly with the interest rate, but with the total value of the mortgage. Your payments are always going to be mostly interest in the first few years, transitioning over to principal in the later years.
Not important today when basically nobody qualifies for the deduction.
My three options seem to be:
1. Live with the small house (and awesomely small principal) we have, at least until the bubble bursts 2. Suck it up and pay a ton of money 3. Move far from Seattle.
I'd actually love option 3, but with established relationships in the area, it's not a great option socially for the family.
Sure this is technically option 2, but it's not as terrible if you compare to people that are buying now without having equity grown for years to help purchase.
Unless Seattle stops being attractive to people with high incomes, you have nothing to worry about. Use your current home’s equity to get the house you want.
The situation mainly sucks for people who jump on the equity ladder later than those who jumped on earlier. But that is how our society is structured, and I do not see a reason for that to change soon.
The real problem, is that people are getting shitty jobs and careers and expecting that will cover the lifestyle they want. And are also completely and utterly financially illiterate.
source: California licensed urban planners
you are not wrong about service-level jobs, but you are missing a lot on the availability topic. pre-built conclusions wont help in developing solutions to an undeniable problem of housing
The downpayment is indeed a hurdle to get into ownership. There are times/banks which will allow a much lower downpayment, though that has its risks.
> let alone the cost of taxes, upkeep and maintenance
The renter is of course paying for all of those, as the landlord is passing on all the costs and making a profit on top.
Here's the long term house price to median income ratio chart for the US and UK.[1] We're basically repeating 2008.
[1] https://www.longtermtrends.net/home-price-median-annual-inco...
New housing starts are also interesting. Continuing to trend upward but still well under where we've been in the past. https://fred.stlouisfed.org/series/HOUST
Where does all this money go? I'm serious. If you put it in the bank it makes 0.01%.
No question there is a bubble, but what's going to pop it, and where do people put their money - and no - I think crypto is pretty garbage so lets leave that out.
P/E ratios on equities are currently crazy as well.
[1] https://www.nahb.org/-/media/NAHB/news-and-economics/docs/ho...
Also the idea that interest rates are at a historic low in the US, many are thinking they should nab a house they can right now and lock in the rate. They are also afraid of inflation so waiting means higher priced houses and higher interest rates, which means they have to go to a "worse" neighborhood or area, or less of a house. So the pressure is to get something now.
It's hard to see this demand going away for the next 5-10 years while millennials are having their babies.
We will see.
https://www.cdc.gov/nchs/data/vsrr/vsrr012-508.pdf
Maybe birthrates among those with higher incomes are trending up? I could not find statistics on that quickly.
Some more data:
https://www.brookings.edu/blog/up-front/2021/05/24/will-birt...
I think many are trying to jump into their forever home so they can enjoy it without being worried for the future when they need to upgrade and are priced out. This is at least the dynamic in the bay area.
You could slightly bet on value ($VTV) for having better current profits (P/E 20 means effectively 5% real interest w/o growth) and typically doing better in rising rate environments (many banks in the index which have better profits on larger interest rate spreads).
It's good to read about it a little bit or pay someone to tell you what to do (200$ for a session won't matter much in 10 years). Ie where I live, the longer you have stocks the lower taxes are (20% at 0 years, 0% years), so it makes sense to invest in the long here, and you want to get funds that reinvest the dividends (Accumulating funds) so you don't have to pay taxes on the dividends every tax period.
VFMF (Vanguard’s higher growth, lower valuation S&P500 ETF. However has low trading volume.)
ESGV (Vanguard’s Environmental Social Good S&P500 index. Make good money for retirement while retiring in a world you want to live in)
XHB (SPDR S&P500 Homebuilders ETF. There’s clearly a housing shortage, so here’s a direct way to help the world build more homes.
Disclosure: I am medium/long-term invested in all of these.
Investments by their nature are not 'stable'. Investments pay off because there is risk involved.
Asset-wise, the crypto analog are NFTs, yield tokens, or other inherently scarce or income generating entities.
But to each their own.
If there is a crash and they didn't lose their jobs, they may wind up under water. Meaning that they can't afford to move. But they still don't experience rate hikes.
The minority of owners on ARMs do experience interest rate risk. But the fact of that risk is exactly why consumers prefer the 30 year fixed mortgage.
My understanding in 2008 was that many people did adjustable rate mortgages (ARM) and then couldn't afford the rate hikes and defaulted. Since then everyone is afraid of getting into an ARM.
A rate hike would only affect prospective buyers.
Fixed rate in the US means it's fixed at loan origination for the entire life of the loan.
https://www.fitchratings.com/research/structured-finance/cov...
Edit, just found this:
https://www.iamexpat.de/housing/german-mortgages/types-mortg...
Annuitätendarlehen is indeed the same as a US fixed rate.
* raise rates -> the whole house of cards collapses as 10+ years of easy money have created a monster.
* keep rates at zero (actually negative) -> the monster keeps growing as people are basically forced to speculate
how this hairball will unwind is anybody's guess. in a sense the pandemic was a reprieve cause basically all risks globally have been absorbed into government liabilities through the massive and unprecedented support to the private sector
a return to biological "normalcy" may actually become an economic (or at least a market) abnormality...
all this amidst rising geopolitical tensions as the pax sino-americana and its supply chains are being dismantled
it all feels quite unhinged and who knows what hidden liabilities have been created
If the central banks raise rates slowly at a quarter basis point at a time, it might not cause a crash. That is their current plan and I think it will work.
Obviously they can’t in good conscience go raise rates 2% all at once.
It seems that, like inflation, the EU sees the same trends as the US but with the value roughly divided by 2.
However, in the US, the west&east coasts (especially suburbs) and a few metros (Austin, Denver, ...) the numbers are probably 4x that, so I wonder if in EU there is a similar trend, with some hotspot cities.
The issue with housing is that rates are very low but there are parts of Europe, just like in the US, that have been performing well economically so low rates just pour fuel on the flames (without really helping the parts that aren't doing well). This also applies to some countries, like Denmark, that have pegged their currency to the EUR (I have no idea how the Demark peg is sustainable, it makes no sense, they had strong growth, unemployment below the natural rate/serious supply issues pre-Covid, and negative interest rates...this is not a good idea, because their mortgage market is heavily securitized the impact of this likely won't come out for years i.e. when the people who have invested in the covered bond market come to pay out to retirees, and those people find out they don't have enough to retire ever).
Do they have a choice? I was under the impression that all EU members agree to join the eurozone (without a time limit, so they can just stall forever, like Denmark seems to be doing), and peg their currencies to the euro pending them joining the eurozone.
And their choice is not to peg to an economic region that is nothing like their own (although tbf, this is true of Germany/Netherlands/Austria/etc. too). The EU is not inevitable. The distortion to financial markets is not worth any political benefit (this has been true of the EU since its inception, first Germany and France were in crisis, then 2008, then debt crisis...what a mess).
Most people (teachers, nurses, etc) are on €35K-45K or less gross annual salary. Cut out ~50% taxes/healthcare and living expenses and calculate how many people can afford a €500K two-bedroom apartment from '72 near Amsterdam.
Also, be prepared to drop another €20K on middlemen, notaries and tax to finalize the home purchase.
It seems obvious to blame local governments all over The Netherlands who fail to make enough space available for building new houses.
https://www.destatis.de/DE/Themen/Wirtschaft/Preise/Erzeuger...