The Health of the World’s Real Estate Markets
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The world has divided into two camps as far as housing and real estate are concerned. In one camp, nations that have found a way to grow their real estate markets at an acceptable pace without creating a bubble of overvalued properties. In the other, countries that are floundering amid present or impending real estate busts similar to the one that led to the “Great Recession.”
The Strong Markets
The world has divided into two camps as far as housing and real estate are concerned. In one camp, nations that have found a way to grow their real estate markets at an acceptable pace without creating a bubble of overvalued properties. In the other, countries that are floundering amid present or impending real estate busts similar to the one that led to the “Great Recession.”
The Strong Markets
According to a recent article in The Economist, Prices are now rising in 19 of the 26 housing markets it reviewed. In these strong markets, real estate grew at a median pace of 5.2 percent per year. The secret to these nations’ success is the cheapness of borrowing. In order to boost demand for real estate, the central banks of strong market nations loosened monetary policies, and then kept them loose. Mortgage rates around the world in these strong markets remain at historic lows (e.g., the interest rate on a 30-year fixed-rate mortgage in America: 4 percent).
In an interesting example of the “invisible hand of the market” at work, rather than take advantage of these low rates to make quick profits at the risk of creating a future bubble, lenders have adopted much more stringent, self-imposed lending criteria. This has naturally regulated the market and allowed for smooth and even growth in these countries.
America is close to even value relative to rent, but has actually seen a significant slowdown in new construction. Ireland has seen the largest increase in home prices, but it is still nowhere near pre-crash levels. Great Britain closely follows with enormous demand but limited supply pushing up real estate prices.
The Weak Markets
On the other hand, the weak markets have either failed to learn a lesson from past mistakes, or are about to stumble into an economic trough for the first time. China has seen its decade long construction boom slowly dwindle to virtually nothing, much as America’s did just before the crash. Greece, still struggling to right itself after its much-publicized financial woes of recent years, has yet to adopt new policies adequately addressing problems with the housing market, leaving it in the weak market category for the near future.
Australia and Canada seem to teeter on the verge of a second bubble. Property values in those countries are 61 percent overvalued relative to rents in Australia, and 89 percent overvalued in Canada. These nations appear not to have learned the lessons of greedy short-term gains through poor lending practices, so their banks’ low interest rates have led to unhealthy borrowing and purchase practices likely to result in a new bubble.
Meanwhile, other weak international markets of not include Spain, France, and Italy. Unemployment may be the culprit in these nations, as large swaths of their populations have emigrated to countries with stronger economies and more opportunities. This has resulted in lower demand and lower prices.
