"Red light" for the Housing Market

"IN 1625, Pieter Fransz built a house in Amsterdam’s new Herengracht neighborhood. As the Dutch Republic rose to global power in the 1620s—with Amsterdam developing the world’s first major stock market as well as commodities and futures markets—the price of the house doubled in less than a decade.

Over the succeeding three centuries, the price of Fransz’s house was knocked down by wars, recessions, and financial crises and rose again in their aftermaths (Shorto, 2006).

When the house changed hands in the 1980s, its real value, that is after inflation, had only doubled over the course of 350 years––offering a very modest rate of return on the investment."

"From a historical perspective, it is not the trend but the volatility in housing prices that is distinctive"

"Starting in the late 1990s, prices of houses in Herengracht, and more generally in Amsterdam, doubled in value in 10 years, only to begin another sharp decline. This recent run-up and correction in prices in Amsterdam was part of a global boom and bust in house prices.", loungani, March 2010

A good lesson can be draw out of this article - After all it's all about equilibrium, what goes above or below its long term average tend to correct toward it. Somehow this what I have been suggesting all along in this blog see this post.

1- The ostrich effect


I think humans somehow behave like ostrich, they derive a strategy based on a very limited amount of information and tend to extrapolate it: like the ostrich that put its head in a hole and thinks it's safe...

Instead, this blog try to give you a eye bird view, a 10 000 mile view that allow you to see the whole picture... at least not to become an ostrich.

2- The FeedBack Effect

"One reason house prices go up so rapidly is that the supply of housing cannot be adjusted quickly.

Another reason lies in the interaction of housing and financial markets. Because houses serve as collateral, an increase in house prices can have a feedback effect: once collateral values increase, banks are willing to lend even more to households, which feeds the house price boom.

This feedback effect can arise regardless of what caused house prices to go up in the first place—demand momentum, government policies such as low interest rates, or institutional changes that increase the availability of mortgage credit."

We are spot on with regard to the causes and the effect it created. Clearly the mortgage market grew faster than the supply of housing , then the wealth effect took hold pushing price higher and higher in a similar fashion as in the musical chair game; when the music ends, one is set to lose and lose big in this case.

3- The conclusion

"First, house prices in most countries still remain well above the levels observed at the beginning of the upturn in the early 2000s. Second, house prices remain above rents and incomes, which, as discussed above, often serve as long-run anchors for prices. (...)

"That leads to an uncomfortable conclusion: house prices in many countries still have room to fall."

I think it is clear that from this point any rise in housing price is only strenghtening the case for the current housing bubble, but more worryingly bigger it grows, more damage will be inflicted to the economy.