In the comments to my recent post on housing prices, Amon asked if a housing crash is a potential reality.
In my opinion, the answer to this question is a definite yes. In fact, it has happened in a western country before.
The late 80’s (1986 to 1990) saw skyrocketing land and stock prices in Japan. It got so bad that many banks were offering 100-year mortgages. The Wikipedia article on this contains the following graph based on data from The Economist:
According to this graph, the current housing boom in the US, UK, Britain and Australia is worse than that in Japan!
As for the after-effects of the Japanese housing boom, this article from the New York times has a pretty good write up. A couple of choice quotes:
So Mr. Nakashima, a Tokyo city government employee who was then 36, took out a loan for almost the entire $400,000 price of a cramped four-bedroom apartment. With property values rising at double-digit rates, he would easily earn back the loan and then some when he decided to sell.
Sound familiar?
Homeowners were among the biggest victims of the Japanese real estate bubble. In Japan’s six largest cities, residential prices dropped 64 percent from 1991 to last year. By most estimates, millions of homebuyers took substantial losses on the largest purchase of their lives.
According to the NY Times article, the Japanese housing crash was triggered in part by some bad policy decisions by the Japanese equivalent of the Reserve Bank. So while our markets may not crash as hard as the Japanese market did, history does not bode well for our current situation.
Update (23/08/2007): I came across this article and it mirrors what I said in this post and my last one.
2 comments ↓
Interesting stuff…I just read an article this morning about debt levels in the UK. I have also seen articles that reflect this in AUS and the USA as well.
The UK debt level, mortage/secured/unsecured, has risen above annual GDP this year (1.3 trillion GDP, 1.34 trillion debt). This means (correct if I am wrong as i’m not the economist) that we are basically spending more than we are producing as consumers. This means we have to rely on next years GDP to pay back our spending for this year…
A large part of this debt is mortage debt and secured debt, however there is also a large section of unsecured debt brought about by relaxing the borrowing regulations.
How far can we go with the ‘buy now pay later’ consumerism? Surely this can’t be sustainable? The creeping interest rates will surley have to peg this back soon?
This would then see, as Craig describes above, a correction in the market place. As most of this debt is in mortgages, a relative drop in house prices back to a normal level.
Another thing that would be good to touch upon is credit card debt…the average in AUS is about $3000/per person, in the UK it is £3500/person. Insolvency is up almost double in the UK, AUS and USA.
We are living in a society built on very poor foundations…it seems the reason we are so well off is that we are all living 20 years ahead of ourselves…this theory is only valid if we assume variable factors (politics/environment/society/health etc) remain the same.
I know that most things have been stable for years now…but the only thing that is certain is…that things will change.
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