Are Worldwide House Price Increases Sustainable?

 |  Includes: EEM, EWM, EWS, IDX, INP
by: Nikhil Raheja

Since March 2009, many of the stock markets in the world have soared upwards, including those in the US. Are these increases sustainable and real, or are they merely corrections in a larger and more devastating bear market? It depends. Some stock indices in Asia are up over 100% in the last 3 months, while there are others which have only gained in the neighborhood of 20-30%. Regardless of the future strength and prospects of the different markets, it is unanimously agreeable that the whole world underwent a housing bubble over the last 7 years.

During this period, some countries saw house price increases of 100%, while others like India saw increases of over 300%. Isn’t it logical that the larger the boom, the greater the bust? Not necessarily. A bust is not a function of the previous house price increases but rather of an often talked about characteristic, the total Household Debt as a % of GDP. This feature contributed to a massive decline in the housing and stock markets in some countries, while it turned the tide in favor of some other countries.

Household Debt as a % of GDP is an indicator of the consumer debt burden the population in a country has taken in proportion with its Total Income. If the total household debt rises too much due to mortgages, credit cards, or home equity loans, it becomes difficult for the consumer to manage his household expenses in the face of tough times such as high job losses. Case in point is that of United States residents who have historically abused credit cards during spending frenzies. The household debt in the US as a % of the GDP (as shown in the foggy graph below) was 102% at the start of 2008.

Click to enlarge

As house prices in the US started to decline, homeowners were faced with the dilemma about whether they should continue to make mortgage payments while their homes had negative equity. Invariably, people decided to default on their mortgages since their financial positions were poor and they had little hope or desire of paying off their mortgages in full.

Click to enlarge

Compare that with the household debt in different countries in Asia, which also had housing bubbles of the same size, if not bigger than those in the US and Europe.

Click to enlarge

Remarkably, each of the countries with debt greater than 50% has witnessed higher declines in house prices than those with lesser debt. House prices in Singapore have fallen over 25% in the last 3 quarters (The Jakarta Post, “Singapore Q2 property prices drop 5.9 percent”), while house prices in Hong Kong fell over 26.8% in 2008 (, “Property Prices' Biggest Declines in Hong Kong, London and Dubai”).

Compare this with the little or no declines in the house prices in Indonesia up until 2009.

Indonesian Home Price Index (

Also, India’s Household Debt to GDP % is at 27% (Goldman Sachs, February 2009), and that has prevented a massive decline in house prices in India, despite an increase of over 300% in house prices on average over a period of 7 years. To understand the magnitude of the bubble in India, look below at the House Price to Income ratio in India, and compare it with that in Singapore, which has ironically seen greater declines in home prices. This may seem counterintuitive since if incomes are so low, the only source of money would be debt, but in India’s case, the housing bubble was financed by capital inflows from abroad

House Price to Income Ratio - India Compared to Continent (

Click to enlarge

One remarkable point is the real-estate boom in Chennai (a leading Indian city) and its suburbs, leading to high prices in decent housing and then finally prices dropped. For example, an apartment of 1500 square foot in Chennai’s suburb will cost around US$ 200,000, whereas in Europe similar size costs about US$ 450,000. In a class “A” suburb of New York you can buy a large house for around same amount, US$ 450,000. However, the ratio between the Per Capita Income of the US and the Per Capita Income of the India is around 50:1 ($50,000 to $1100); this suggests the presence of a much larger housing bubble in India than in the US. The house prices have so far declined by 10-20% since the crisis, a decrease much smaller than that in the US.



The countries that have escaped massive decreases in home prices have seen an increase in loans made over the past 6 months. A prominent Indian Bank, IDBI Bank, has announced loan growth of 15% during the April-June period this year. The sixth largest lender in Indonesia, PT Bank Danamon Tbk, has announced its loan growth of 14% for the same period. These loans allow producers to manufacture and consumers to borrow to consume, helping the economy to grow. On the other hand, banks in Singapore have slowed down the loan growth, leading to a significant decrease in the GDP of the country.

Hence, it is no surprise that the stock markets of those countries without high household debt have performed much better than those with higher debt.


The Indonesian market has grown almost 100% since November '09.

India’s Bombay Sensex (LOW HOUSEHOLD DEBT)

The Indian market has risen 100% too since November '09.

Dow Jones industrial Average (HIGH HOUSEHOLD DEBT)

The DJIA, on the other hand has risen only 33% since March 09, and is at the same point it was at in November '09.

Singapore’s Straits Times (HIGH HOUSEHOLD DEBT)

Singapore, enveloped by Indonesia and Malaysia grew 60%.


Malaysia, a neighbor of Indonesia and India has risen only 30% since November '09.