Real estate analyst, Mark Hanson, notes that housing prices in the United States are the same to 20% higher than they were during the 2006 real estate bubble, but median incomes are down 5% to 10%. He believes the housing market is being propped up by unorthodox capital at a time when average families are not buying because of high prices. Believing that U.S. housing prices are inflated 25% to 60% higher than the market can support, Hanson anticipates a sudden resetting of market prices to 20% or 40% lower than they are today. However, the United States is not the only real estate market exhibiting warning signs.
The Telegraph reports, “Property prices have climbed to dangerous levels in several advanced economies, raising the risk of massive price falls if markets overheat, according to the Organisation for Economic Co-operation and Development (OECD).” Countries around the world, such as Canada and Sweden, have commercial and residential prices that are “not consistent with a stable real estate market.” Real estate in Mumbai, India has experienced a 500% appreciation since the year 2000, and prices in Shanghai, China have surged 587% over the same time period. In fact, the real estate bubble in China is the largest of any major country in modern history, boasting the most overvalued prices in the world. Real estate prices compared to personal income are 37 times higher in Hong Kong, 33 times higher in Beijing, 27 times higher in Shanghai, and 25 times higher in Guangzhou.
China’s real estate bubble is driven by the over-investment of a government promoting urbanization and high savings rates by the Chinese people who love real estate and tend to shun stocks and bonds. China has built entire cities that are uninhabited, and as much as 24% of condos and houses in Chinese cities remain vacant. In fact, 53% of home purchases have been for investment purposes in a country where home ownership is nearly 90%. Not only has China over-produced commercial and residential buildings, but China’s demographic trends have peaked. An aging population and a declining workforce is not likely to provide the demand needed to meet China’s real estate supply. Foreseeing an inevitable bursting of the bubble, over half of China’s millionaires are considering emigrating to protect their wealth. Given the inflation of global real estate markets and the potential of catastrophic losses in a market correction, real estate cannot be the financial refuge that we seek.
This article is excerpted from the paper “Seeking Refuge in a Precarious Economy.”
1. Jennings, Daniel. “Is America Facing Another Real Estate Bubble?” Seeking Alpha, March 15, 2016. Accessed January 24, 2017. http://seekingalpha.com/article/3958565-america-facing-another-real-estate-bubble.
2. Chan, Szu Ping and Isabelle Fraser. “Fears of a ‘Massive’ Global Property Price Fall Amid ‘Dangerous’ Conditions and Market Slow-Down.” The Telegraph: Business, January 2, 2017. Accessed January 24, 2017. http://www.telegraph.co.uk/business/2017/01/02/fears-massive-global-property-price-crash-amid-dangerous-conditions.
4. Dent, Harry Jr. The Sale of a Lifetime: How the Great Bubble Burst of 2017–2019 Can Make You Rich, 326. New York City: Penguin Random House, 2016.
5. Ibid, 234.
6. Ibid, 239–240.
7. Ibid, 237.
8. Ibid, 234.
9. Ibid, 240.
10. Ibid, 248.
11. Ibid, 240.
12. Ibid, 239.