Director MBMG Investment Advisory
Boom and Bust: Are housing markets
back on the rollercoaster? Part 2
Given its culture of low levels of credit and the predominance of
fixed-rate mortgages, it would be natural to assume that house prices in the
Republic evolve slowly. Whilst there was no boom and bust scenario per se
before, during and after the GFC (global financial crisis), prices are
comparatively very high compared with a decade ago.
Unsurprisingly for such a centralised country, prices in
the Paris area have risen at a higher rate than their equivalents in Lyon
and Marseille. Whilst property values in France’s second and third-largest
populated areas have risen steadily in the last decade, they have both seen
around a 40% rise - a steady return on investment.
One of the main triggers of the GFC was, of course, the bursting
of the US property bubble. The Federal Reserve’s reaction to this was
quantitative easing (QE) - adding huge sums to the money supply in an
attempt to boost markets, such as property, by making borrowing more
affordable. It is clear from a real estate point of view that QE isn’t
working. Whilst prices in the Los Angeles area have grown a respectable 10%
in the last ten years, the New York area has gained just 7.5% and Chicago
has actually dropped 8% in price.
Whilst the US housing market is stagnant at best, after the first
quarter of 2014, the Spanish national average price was an eighth lower than
ten years previously. Breaking this down into the three most populated areas
shows a similar story for Barcelona and Valencia; Madrid faired even worse
with prices over 20% below their level a decade ago.
Spain’s housing bubble had been going on for ten years
when prices started to fall in 2007-2008. There had previously been a boom
between 1985 and 1990. Whilst this surge levelled out in the 1990’s prices
were still rising overall. The current situation is totally different,
however: the property bubble began to burst a few months before its American
equivalent and is still deflating. Analysts may suggest this is a buyer’s
market; but with prices so low for six years, it raises the question as to
what extent property will regain value and thus bring any reasonable return
Spain is very much the doomsday scenario, of course, and local
policy is constrained by Spain being in the Eurozone - meaning the
policy-making central bank is based in Frankfurt and has 17 other countries
to concern itself with too.
Nevertheless, it still provides a relevant example of how a housing market
can burst uncontrollably. The central banks in Australia, the UK and
elsewhere should take heed. So too should investors, when contemplating
putting money into bricks and mortar.
The best long term property data (300 years of Amsterdam data) is an
excellent hedge against inflation that also produces income. Research by Ian
Gordon1 confirms our belief that property may benefit during 3 of the 4 long
wave economic cycles. However, this could well be the period for many
property markets when we’re in the part of the cycle that doesn’t and the
reversion to mean may be a very mean experience for many property investor
1 www.thelongwaveanalyst .com
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responsible for any errors that may occur. The views of the
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market conditions and should not be used in isolation.
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