Real estate markets are not like stock markets. They are ‘sticky’. It takes time for owners and buyers to realize that the fun is over

The real estate market in the United States looks like it is finally recovering from its disastrous decline. The number of housing starts surged in September to the highest level in four years. Home builder’s confidence rose to a level not seen since the peak of the real estate bubble six years ago. This is certainly welcome news. Home construction always makes up a large share of the gross domestic product (GDP). The number is usually about 5% although in China the number is much higher about 13%.

Any improvement though would be good news. The US housing bubble was created by a rise of about 85% in six years from 2000 to 2006. After that the market fell 36%. The market also collapsed about two years after it started to decline. Even though the news in the US is good, there are still problems in many countries. According to the International Monetary Fund (IMF), home prices are still falling in 25 countries of the 54 tracked by the IMF. Leading the way was Ireland followed by the usual suspects: Greece, Portugal and Spain.

There are other markets that did not collapse, quite the contrary. The various quantitative easings (QEs) and other stimulus programs created by the US Federal Reserve together with the loose monetary policy in just about every country have had a much broader effect than finally reviving the anaemic US market. Global central banks’ policy of encouraging asset appreciation has been far more successful and dramatic in many other countries. It has pushed stocks, currencies and real estate markets sharply higher.

In September after QE3 was announced Indonesia experienced a net inflow of $1.3 billion in bonds compared to an outflow of $540 million in August. South Korea was in a similar position. It had an inflow of $1.4 billion in September verses an outflow of $2.4 billion in August. Many equities markets in Asia have also benefitted from the Fed’s largess. Thailand’s market is up 28% this year. The Philippine market is up 24%. The Indian market has increased by 23% and the Hong Kong market recently reached a 14-month high.

Real estate markets in many countries have risen dramatically in the past few years, some to levels that are neither rational nor sane. Hong Kong is a good example. Housing in Hong Kong has benefited from a flood of money coming out of China. Its house prices have doubled and have been labelled “seriously disconnected” from the slowing economy by a high government official. Singapore’s real estate has also risen by 56% from 2009. But these are small markets.

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On a slightly larger scale are two commodities countries, Australia and Canada. The commodities these countries produce have benefitted from both the central bank inflation and demand from China. The benefit is reflected in their real estate markets. Like the US, Canada’s real estate market has risen, but just more slowly. The difference is that it continues to rise and is now at 125% of 2000 levels. While this is impressive, it pales compared to Australia where prices have risen 150%. According to one survey, houses in Australia are seriously unaffordable. If these bubbles deflate there would certainly be an impact, but these are still relatively small markets, unlikely to cause problems in the global economy. Also they are still rising, so any collapse might take a bit longer. This may not be true for three much larger markets: India, Brazil and China.

In China house prices have risen over 250% since 2009. The problem is so severe that last year the government increased restrictions on the market to rein in prices. But those restrictions are being ignored and prices have begun to rise again.

Brazil is another hot market. Real estate markets have risen 90% since 2009. Office space in Rio and San Paulo is the most expensive in the western hemisphere. Prices are also high in India where prices have also risen over 250% in the past ten years.

Unlike small markets in Hong Kong, Singapore, Canada or Australia, if the housing prices fell dramatically in any of these larger markets, it would have a far greater impact. The question is whether these dramatic price rises reflect a monetary induced bubble and if so are they in danger of bursting?

Perhaps. The prices are certainly high, but more importantly and unlike Canada and Australia they are either declining or rising far more slowly in each of these markets. Real estate markets are not like equity markets. They are ‘sticky’. It takes time for owners and buyers to realize that the fun is over. The other issue is leverage. Like the US sub-prime, the extent to which these markets are leveraged is difficult to determine. Financing and mortgages are often from far different sources. What is clear is that every market does go down. It is simply a matter of time.

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(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected].)