Investment Strategy

The property bubbles that never went away

Even if you don’t own property overseas, any investor in foreign stock markets needs to exercise caution in places with over-priced houses. Bursting property bubbles hit economies hard, dragging down stock markets with them. Certain countries around the world have massive property bubbles that you should be aware of.

In terms of its effect on the economy, a country’s housing market is much more important than its stock market. Many more people own a house than invest in financial markets.

If the price goes up they feel richer, and more inclined to spend. If the price crashes then they slam their wallets shut and try to save more.

Then there are all the businesses that profit from a booming property market. Real estate is big business.

Higher home prices mean that people need bigger mortgages, which means that lending banks make bigger profits (see here for more).

Real estate agents charge percentage commissions based on transaction prices. Higher prices mean higher commissions. And booming markets usually mean more buying and selling activity as well.

Then there are all the others that benefit. The kitchen designers, builders, furniture stores, landscape gardeners – the list goes on.

So it’s no surprise that when house prices crash there is a huge hit to the economy. Less confident homeowners spend less, people lose jobs, mortgages payments aren’t made, banks take loan writedowns, more jobs are lost.

The virtuous cycle of the previous boom soon turns vicious. Perhaps then it’s also no surprise then that governments are happy to let housing bubbles happen, but become desperate when they inevitably burst.

For all the talk, the US housing boom and bust was a relatively tame one. I know it caused, or at least started, a huge financial crisis. But I’m talking here just about the house price moves themselves.

US house prices peaked in mid 2006 and bottomed out in late 2011 around 35% lower on average, in inflation adjusted terms. Then they started to rise again but are still 22% below the 2006 highs.

Sounds bad, right? But that was nothing compared with what happened in certain European countries.

Entry into the euro meant certain countries enjoyed interest rates that were far too low for their own economic conditions. This meant cheap and abundant mortgages, and other types of credit. The borrowing frenzy that followed blew some huge property bubbles.

The most extreme example was probably in Ireland, but there were big bubbles in Spain, Greece and others too. The following chart shows average housing prices, indexed and adjusted for inflation, between first quarter 1997 and first quarter 2015. Ireland is brown, Spain is dark purple, Greece is light purple, and the USA is blue.


Between 1997 and 2006 US house prices rose 74% more than consumer price inflation. By comparison, at their peak in early 2007, Irish house prices had risen a massive 178%. Spain was up 121% and Greece 91%.

Then came the crashes. Irish house prices fell by a massive 52%, Spanish ones by 39% and Greek ones by 45%. (By the way, Japanese house prices are still 47% below their 1990 peak and have never regained a rising trend in 25 years. So much for investing in real estate for the long run…)

Looking at the chart, it’s clear that Irish prices bottomed out in late 2012 and have since been recovering. But they’re still down 41% from the 2007 level, inflation adjusted. Spanish house prices appear to be flattening out and finding a bottom. Greek prices are still falling.

So much for the bubbles that have burst. The main name of the game today is to highlight some other countries where the bubbles never went away…or just continued to grow to ever more epic proportions.

Working our way around the world from West to East the current property bubble countries include Canada, Britain, Singapore, Hong Kong and Australia.

We can see this in the following chart, which compares house prices in those countries, adjusted for inflation, since the end of 1980. Canada is the pink line, Britain dark green, Singapore light green, Hong Kong purple and Australia is shown in light blue. I’ve also added the USA for comparison, shown in dark blue at the bottom.


This chart covers a longer time frame than the first one, because there is more data available for these countries. But it clearly shows how house prices have rocketed in these places over the past generation. Lucky parents and grandparents. Unlucky children and grandchildren.

It’s no surprise that more and more young people in these countries have to stay with their parents or share a rented apartment with friends. These days, the old idea of getting a job and buying your own home is a distant dream for many young people. Some will never achieve it unless prices fall hard. Looking at how house prices have moved compared with average incomes shows the same story.

Buying a home is at or near record expensiveness in these countries, and actually quite cheap in the USA. This next chart shows house prices relative to incomes since 1980, with 100 being the average level within each country, for Australia (light blue), Britain (green), Canada (pink), and the USA (dark blue). (Data for Singapore and Hong Kong weren’t available, but I suspect the story is a similar one.)


And it’s the same story comparing prices to rents as well. All countries have been on a rising trend, with high prices in relation to rents. Canada and Hong Kong look particularly extreme, but Australia and Britain aren’t far behind.


It’s clear that there are still some huge property bubbles around the world. Even if the precise reasons for them vary by country.

For example, in Britain interest rates were slashed following the financial crisis, and the government also brought in subsidised schemes for new buyers with the aim of propping up the market.

Hong Kong is different. Hong Kong’s dollar is pegged to the US dollar for practical purposes, if not formally. So Hong Kong has ultra low interest rates just because the US does. But, whereas the US has had a weak economy in recent years, Hong Kong is a part of China. And as we all know China has continued to grow strongly.

A flood of mainland Chinese money and ultra cheap mortgages has ensured a new property bubble in Hong Kong. I say new bubble, because the last boom and bust was in the late 90s. After 1997 prices plummeted 60% over six years.

I lived in Hong Kong for three years just over a decade ago. I was lucky that my time coincided with the bottom of the property market. That meant I could afford to rent a big apartment with double height ceilings and views of the sea.

Prices these days are over three times as much as when I lived there. For the same money I’d probably be living in some cramped basement these days, with views of a concrete wall.

You don’t have to be an international real estate investor for foreign house prices to matter to you. When bubbles burst they hit the economy and usually bring the stock market down with them.

So if you’re heavily invested or considering investing in stock markets in any of the bubble countries I’ve mentioned – Canada, Britain, Singapore, Hong Kong or Australia – then caution is recommended.

These are the property bubbles that never went away, and in many cases just got bigger. One day they will burst, and it will be carnage.

Stay tuned OfWealthers,

Rob Marstrand

Previous ArticleNext Article
Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.