Sunday, June 19, 2005

Times: Is the global housing bubble set to burst?

by Bill McBride on 6/19/2005 03:37:00 AM

The London Sunday Times asks: Is the global housing bubble set to burst?

As glittering spires continue to rise around the world and buyers still dream of escape to idylls in the sun, the questions grow more pressing. What has driven the boom? Has globalisation changed the law of gravity? Can the vertiginous ascent continue? Or is the biggest pop ever heard about to deflate the global property bubble and take the world economy down with it?
The Times does not completely answer the question. They do argue that stagnation is more likely than a crash. But price stagnation might lead to recession, and a recession might cause lower house prices leading to a deeper recession - a vicious cycle.

Perhaps their real opinion can be gleaned from their choice of companion pieces: Booms Past.


In Holland the craze for collecting tulips peaked in 1636 when investors paid more than 5,000 florins — about £25,000 at today’s prices — for a single bulb. But when buyers dried up, prices plummeted.


The vogue for public companies in the early 1800s produced the South Sea Company, which was granted a monopoly over trade to North America. But the bubble burst in September 1720 when banks could not collect loans on inflated stock.


In the 1920s technological change saw the Dow Jones rise sevenfold, prompting investors to stake their life savings on the stock market. Interest rates rose, Wall Street panicked and by November 1929 two-thirds the Dow’s value had gone.


House prices in Britain soared in the late 1980s, buoyed by low interest rates and tax cuts. When interest rates doubled in 18 months house prices crashed, dropping by 30%-40% in some areas.


In the 1990s internet stocks boomed. But after peaking in spring 2000 they lost two-thirds of their value in three years. Many firms vanished.
For a great summary of previous bubbles, I recommend "Extraordinary Popular Delusions And The Madness Of Crowds", By Charles MacKay, 1841.