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Australia & UK added to our Realty Bubble Monitor ... only USA has completed correction

click to enlarge ... more macro economic charts at our websiteClick to enlarge
click to enlarge ... more macro economic charts at our websiteClick to enlarge

 Overpricing of Avg Home in April 2010:

$

  Bubble Today Bubble @ Peak
$132,000 Australia 41% $155k & 56% (2007)
£ 85,000 UK 108% £ 108 & 146% (2007)
$76,000 Canada 29% $76k & 29% (2010)
$ 2,000 USA 1% $77k & 35% (2005)
Click to enlarge

 Australia's Housing Bubble rises to $132,000 in March

Australian median home prices had already detached from the long term Price/Family-Income ratio of 3.1 back in 1996.  The onset of record low interest rates shortly thereafter enabled consumers to buy more expensive Existing Homes w/o increasing their mortgage payments.  Subsequent irrational exuberance swept the P/I ratio to an unsustainable bubble high of 4.8 in 2007.

The annual price peaked in 2009 @ $451,000.  Despite the rise in price, 2007 is still considered the Bubble Peak as price in that year was $155k (56%) above the trend line.  In its third year of correction, median Price exceeds our 2010 target by $132k (41%).  As shown by trajectory in the chart, it is probable that new highs for median Home Price will not be set 'til 2019.


 UK's Housing Bubble rises to £ 85,000 in April

UK average home prices had already detached from the long term Price/Family-Income ratio of 2.0 back in 1996.  The onset of record low interest rates shortly thereafter enabled consumers to buy more expensive Existing Homes w/o increasing their mortgage payments.  Subsequent irrational exuberance swept the P/I ratio to an unsustainable bubble high of 4.9 in 2007.

The annual price peaked in 2007 @ $181,364 and was £108k (146%) above the trend line.  In its third year of correction, avg Price exceeds our 2010 target by £85k (108%).  As shown by trajectory in the chart, it is probable that new highs for the avg Home Price will not be set 'til 2048.


 Canada's Housing Bubble rises to $76,000 in April ... Canadian Homes 2 x's USA

Canadian average home prices had already detached from the long term Price/Family-Income ratio of 2.7 back in 2001.  The onset of record low interest rates shortly thereafter enabled consumers to buy more expensive homes w/o increasing their mortgage payments.  Subsequent irrational exuberance has swept the P/I ratio to an unsustainable bubble high of 3.5 in 2010.

The year-to-date annual price of $337,520 is $76k (29%) above the trend line.  As shown by trajectory in the chart, and assuming a 2010 Peak, it is probable that new highs for the avg Home Price will not be set 'til 2017.  Unlike Australia, the UK & USA, Canada's real estate sector has not commenced its inevitable correction.

With an April avg price of $345k vs $173k in the USA, this was the seventh consecutive month where Canadian homes were double the price of a similar home in the USA.  Since year end, the Canadian Real Estate Bubble has increased by $9 thousand.  For comparison sake, the USA Housing Bubble was 35% ($77k) above the P/I ratio trend at its peak in 2005.


Canada Backgrounder ~ (rev 2010/5/29) TrendLines Research first drew attention to the topic of Canadian Housing Bubbles in 1989.  Although that particular Bubble was only $53k, it was actually a more severe event as the average price of the time was an unprecedented 55% above the P/I ratio trend ... almost double the current episode.  Families were paying an astonishing 4.2 x's their Income. 

Rather than the recent rapid 4+ year correction (-24%) witnessed in the USA, it took ten long years for the Canadian average price to surpass the 1989 high.  Avg Home Price fell a mere 6% over the first five years.  Considering the momentum in play within the present economic Recovery, it is not unreasonable to expect a repeat of the long-term sideways correction ... with perhaps an absence of new highs 'til 2017.  It would be prudent for CMHC to temporarily increase its down-payment requirements for high-ratio insured mortgages to 10% (from 5%) until the downside risk dissipates.

This recommended action may be difficult in an environment where economists for four of Canada's largest banks have been unequivocal in recent weeks that "there is no real estate bubble in Canada".  They join the Gov't of Canada and the Bank of Canada (see our Wall of Shame below).  We heard their same chorus of rationalizations in 1989 & from their counterparts south of the 49th in 2005!  Both events posed an assault on the Disposable Income of consumers, and wealth effect ramifications resulted in imminent Recessions within twenty-four months.  As elaborated in our Canadian Recession Meter, failure by the Bank of Canada & CMHC to address a winding down of the Housing Bubble could easily turn the expected 2012Q1 economic downturn into a full fledged Recession.

USA's Housing Bubble rises to $2,000 in April ... -$8k for New Homes


Disclosure: no positions

 New Homes:  Record low interest rates coming out of the 2001 Recession enabled consumers to buy more expensive New Homes w/o increasing their mortgage payments.  Added to pent-up demand, this caused median price to rise above the long term Price/Income ratio of 2.4 starting in 2001.  As slack lending guidelines and outright fraud became entrenched, irrational exuberance took the P/I ratio to an unsustainable high of 3.1 in 2005.

The annual & monthly prices peaked in 2007 @ $247,900 & $262,600 respectively.  Despite the rising price, 2005 is still considered the Bubble Peak as price in that year was $52,000 (27%) above the trend line.  Using annual figures, classic "return to the mean" was virtually complete, with median price a mere $2,056 shy of our 2009 target.  But, year-to-date data for 2010 reveals the correction continues in "overshot" mode.

Annualized, this year's target value of $222,000 had been overshot by $8k (2.3 ratio) to the end of April.  Using monthly data, April's $198,400 median price is down $64,000 (24%) from the all time high of $262,600 in March 2007.  More importantly with regards to the economic recovery, unit sales have improved 49% since the February 2010 trough.  As shown by trajectory in the chart, it is probable that new highs for New Home Price will not be set 'til 2013.


 Existing Homes:  Record low interest rates coming out of the 2001 Recession enabled consumers to buy more expensive Existing Homes w/o increasing their mortgage payments.  Added to pent-up demand, this caused median price to rise above the long term Price/Income ratio of 1.8 starting in Y2k.  As slack lending guidelines and outright fraud became entrenched, irrational exuberance took the P/I ratio to an unsustainable bubble high of 2.8 in 2005.

The annual price peaked in 2006 @ $221,900 & the monthly median had its high of $229,000 in 2007.  Despite the rising price, 2005 is still considered the Bubble Peak as price in that year was $77,000 (35%) above the trend line.  By the end of its fourth year in bubble correction (2009), the annual Existing Home Price was within $12k of our target.

Using year-to-date annual figures to the end of April, classic "return to the mean" is $2k from being completed.  Using monthly data, February's $164,600 was down $64,400 (28%) from the all time high of $229,000 in June 2007.  More importantly with regards to the economic recovery, unit sales have improved 27% from the January 2009 trough.  As shown by trajectory in the chart, it is probable that new highs for Existing Home Price will not be set 'til 2018.


USA Backgrounder ~ (rev 2010/5/29) In May 2008, TrendLines Research published guidance that the correction of the USA Housing Bubble would neither be as drastic as forecasts painted by self-appointed pundits, nor would it be as soft as the media voices openly rationalizing the USA housing market was not in a bubble,  Our scenarios predicted the collapse would only be as severe as needed to return the USA's median Existing & New Home Prices to their Price/2-earner Family Income ratio trend lines.

Shortly thereafter (2008/11/18), McDoomer Nouriel Roubini was predicting a 40% collapse in housing prices and that 1,400 banks would "go bust in 2009".  Well, he was out by 1,250 on the latter call, and to date, existing home prices have declined only 28%.  A growingly tabloid-style mainstream media seems obsessed with extreme positions.

Following a long time commitment to Home Price/Family Income ratios to measure real estate bubbles, our first publicly available effort illustrated Existing Homes were inflated by $74k (51%) at the bubble's crest.  Based on our experience with the Canadian Real Estate Bubble of the 90's, we speculated prices would decline 'til at least 2017, and there would be no new American highs set 'til 2029.  But to our amazement, the classic "return to the mean" did not even come close to mirroring the Canada episode, and the correction for both New & Existing Homes was virtually complete by January 2009.  It was no coincidence the economic Recovery commenced the following month ... long before any fiscal stimulus cheques.

While waiting for the realty sector (and general economy) to correct (recover) completely, we had been awaiting four bottoms.  The first two were Existing Home transactions/month & Existing Home Median Prices.  Done ... January & January (2009) respectively.  The remaining pair were New Home monthly sales & Prices.  Done ... January & March (2009) respectively.  An increase in monthly transactions was important to the Economy 'cuz it brings on increased revenues via purchases of furnishings, appliances, landscaping/gardening,  With respect to New Homes, rising sales also mean "jobs".

The passing of the bottom of Prices for both categories is important 'cuz the subsequent apparent increase in "wealth effect" affects consumer demand and durable good sales.  As the economic Recovery took hold, New Home Price rebounded 10% within 20 weeks of the March 2009 low.  Unit sales rose 27% from the January 2009 bottom by July.

A return to the mean is both natural and necessary for economic stability.  In the early 80's & 90's, we twice saw the Fed raise rates to embattle the Inflation cycle.  An upward effect on mortgage rates left less Disposable Income for consumers to spend on holidays, clothing, durable goods, etc ... and Recessions ensued.  The purpose was to quell overheating Economies.  And it worked.

Due to winterization costs, Canadians spend an average 2.7 x's 2-earner Family Income for their residences, compared to a 1.8 factor in the USA.  Analysis reveals avg Home Price in both nations detached from the home price/family income ratio trend line after 1999 (see charts) along with avg New Home Price.  Lower interest rates made upgrade purchases almost painless.  Then irrational exuberance set in...

In 2001 the Fed lowered interest rates to draw the Economy out of its Technical Recession.  Many consumers, recently burned by the Dotcom fiasco, began to invest heavily in Real Estate rather than the volatile, collapsing Stock Market.  Low interest rates enabled the purchase of more expensive homes for the same monthly servicing cost, even w/o an increase in Family Income ... and housing inflated.  At the same time, new sub-prime mortgages flourished, compounded by rampant fraud by buyers, mtg brokers, appraisers, lawyers, lenders, mtg aggregators, investment banks and bond rating agencies.  Artificial Demand was greater than Supply, and the Realty Bubble was under way.  As Existing Home Prices attained levels of 2.8 x's Median Family Income, it was all to clear that irrational exuberance was fuelling the frenzy.

The USA norm for Median Existing Home Price is only 1.8 x's the  median of 2-earner Family Income.  With extraordinarily higher prices, many families were drawing from their Disposable Income to pay higher monthly mortgage payments.  This left less funds for family budget spending on holidays, clothing, durable goods, vehicles, etc.  Coming out of the Recession, mortgage interest rates began to rise.  Add to the fray the higher energy costs for transportation and heating fuel that was in play, and we had the recipe for a Severe Recession.  The Fed recognized this scenario unfolding and attempted a succession of lower Interest Rates to keep the Economy humming ... but alas, could not avert negative GDP growth rates.

The realty correction plunge was unexpectedly swift ... much faster than we originally forecast, and resulted in a return to the trend line in January 2009 using monthly data.  It is no accident that the Severe Recession came to an abrupt end in July ... prior to delivery of the first fiscal policy stimulus cheques.  Nasty real estate & mortgage practices caused the economic contraction, and the return to norms also helped in getting out of the downturn by restoring Confidence