Dr Doom: The global housing bubble is back


It’s congratulations all around to global central banks today as the seer of the GFC, Nouriel Roubini, returns to declare the obvious, that the global housing bubble that brought the global economy to its knees is back, and it’s bad! From Project Syndicate:

It is widely agreed that a series of collapsing housing-market bubbles triggered the global financial crisis of 2008-2009, along with the severe recession that followed.

…Now, five years later, signs of frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and, back for an encore, the UK (well, London). In emerging markets, bubbles are appearing in Hong Kong, Singapore, China, and Israel, and in major urban centers in Turkey, India, Indonesia, and Brazil.

…With central banks – especially in advanced economies and the high-income emerging economies – wary of using policy rates to fight bubbles, most countries are relying on macro-prudential regulation and supervision of the financial system to address frothy housing markets. That means lower loan-to-value ratios, stricter mortgage-underwriting standards, limits on second-home financing, higher counter-cyclical capital buffers for mortgage lending, higher permanent capital charges for mortgages, and restrictions on the use of pension funds for down payments on home purchases.

In most economies, these macro-prudential policies are modest, owing to policymakers’ political constraints: households, real-estate developers, and elected officials protest loudly when the central bank or the regulatory authority in charge of financial stability tries to take away the punch bowl of liquidity…To be clear, macro-prudential restrictions are certainly called for; but they have been inadequate to control housing bubbles.

…But the global economy’s new housing bubbles may not be about to burst just yet, because the forces feeding them – especially easy money and the need to hedge against inflation – are still fully operative. Moreover, many banking systems have bigger capital buffers than in the past, enabling them to absorb losses from a correction in home prices; and, in most countries, households’ equity in their homes is greater than it was in the US subprime mortgage bubble. But the higher home prices rise, the further they will fall – and the greater the collateral economic and financial damage will be – when the bubble deflates.

In countries where non-recourse loans allow borrowers to walk away from a mortgage when its value exceeds that of their home, the housing bust may lead to massive defaults and banking crises. In countries (for example, Sweden) where recourse loans allow seizure of household income to enforce payment of mortgage obligations, private consumption may plummet as debt payments (and eventually rising interest rates) crowd out discretionary spending. Either way, the result would be the same: recession and stagnation.

Houses and Holes
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  1. The only option to avoid a massive wave of deleveraging and deflation (and protect the banks balance sheets) was to re-blow the bubble.

    So over a trillion a year in the US alone – globally dog knows how much has got us back here. The most epic global monetary policy ever.

    Should be fine.

    • This is what Jefferson meant by “first by inflation, then by deflation”. THis is the inflation part. The deflation is the inevitable result of the credit bubble, although given QE, it should be manifest in a USD crisis rather than conventional deflation.

  2. Sorry,
    Roubini is a one trick pony. At a previous job I had access to his consultancy’s regular reporting. Post GFC it continued to be doom laden and virtually every prediction was wrong with excessive pessimism. A stopped clock is right twice a day. The GFC was Roubini’s moment in the sun.

      • That’s what I said.

        I guess you are saying he may be right again here.

        My point is that someone who always predicts disaster isn’t worth listening to.

        BTW, to argue that there is a bubble in Australian housing you also need to argue that there is a bubble in Australian bonds with real yields having fallen from 7% to 1%. Housing real yields have actually fallen by less than this.

        • Real income yields (net outlays) on Australian residential property are negative. If thats not the definition of asset overvaluation, i dont know what is.

          Comparing “how much yields have fallen” between asset classes is irrelevant.

        • Your argument is coherent – cheap capital has flooded asset markets and driven prices for decades.

          If/when access to continually cheaper money dries up, or panic drives the speculators to stop borrowing at ever growing volumes the taps would turn off, the music stop and basically all asset prices would collapse. We saw a taste of this as the GFC.

          It is a global phenomenon being realised over decades, with no one being able to (credibly) foretell what (if anything) will finally break the system. But we do know it will continue to drive all fiscal and monetary policy of every government.

          Your point is nullified by the fact that much of the world is basically in emergency conditions since the GFC (the latest taper debacle as evidence)? i.e. – we are in a disaster.

        • Look, it is not so much a question of “who predicted the day/week/month/year of the crash”, the argument is really between those who say “this is a new normal” and those who say “it is not”.

          I am one of those who say “it is not”. The book has yet to be written, regarding just how long house price bubbles can be prolonged for by every dirty trick in the book from governments and central bankers. If Australia’s bubble had burst FIRST, taking everyone by surprise, it might have been the Irish still successfully prolonging THEIRS.

        • The flip side of low Aussie bond yields is an overvalued Aussie dollar.

          That isn’t why Australian housing is in a bubble though. housing is in a bubble because Australian households are dramatically overestimating their future income growth.

          • And capital gains in their investment properties, or even their family home, is part of that “income” expectation.

  3. Roubini is actually a bit wet behind the ears. There has NOT been a “global housing bubble” that has burst and is now on its way back up; MOST of them by nation, have NOT burst, because governments and central banks that were not taken by surprise like the Yanks, Irish and Spaniards, have used every dirty trick in the book to keep theirs not only inflated, but “inflating”.

    THIS guy has been on the case for years:




    As he said a few years ago already:

    “It is simply mind-boggling that the world is back to blowing massive property bubbles so soon after the U.S. and peripheral European housing bubbles popped and caused such incredible economic carnage. The Western and Northern European housing bubble is proof that we are living in the era of The Bubble Bubble (a bubble of bubbles) as well as an era characterized by the most outrageous arrogance and hubris that humanity has ever experienced. The 2008 global financial crisis should have taught everyone their lesson once and for all, but we are clearly living in a world filled with excruciatingly slow-learners. More punishment is coming our way and will keep coming until we finally learn from our mistakes. Sadly, by the time we learn from our mistakes, it will likely be too late.”

    • It has become so absurd that the issue is actually trying to value anything, and make sense of this in a fiat currency.

      Our standard valuation tools are all linked to fiat that has predictability and certainty over time. This is no longer the case, given the importance of certain assets to peoples lives perhaps we should be treating this in reverse and treating these assets as part of a unit of value – a sort of TWI of mixed currencies and assets.

  4. Correction required:
    “most countries, BUT NOT AUSTRALIA, are relying on macro-prudential regulation and supervision of the financial system to address frothy housing markets. That means lower loan-to-value ratios, stricter mortgage-underwriting standards, limits on second-home financing, higher counter-cyclical capital buffers for mortgage lending, higher permanent capital charges for mortgages, and restrictions on the use of pension funds for down payments on home purchases.”
    Aus govt wants to simultaneously fail next generation and destroy the socio-economy – simple.

  5. From the full article:


    “…..One of the countries with the most severe housing bubble in the past cycle, Spain, actually was a pioneer in some of these macroprudential tools. The Bank of Spain put in place countercyclical capital requirements before countercyclical capital requirements were cool. But it clearly wasn’t enough to stop the bidding up of Spanish real estate, and the country remains in a depression today as a result…..”