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Housing-Bubble Risk Is Still at Lofty Levels Around World

Housing-Bubble Risk Is Still at Lofty Levels Around World

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Friday, 30 October 2015 10:46 AM Current | Bio | Archive

Swiss bank UBS has released its “2015 UBS Global Real Estate Bubble Index" for housing markets of selected world cities, and it warns about corrections in the global housing markets.

These corrections started in 2007, but didn’t have sufficient time to offset the price increases of about 130 percent they had experienced since the mid-1990s because they were halted amid the QE programs. These corrections could re-ignite and set the stage for another downturn in several overheated global housing markets.

The UBS report takes housing prices in today’s leading global financial centers, which they call fundamentally unjustified and means the risk of a real-estate bubble in these cities is still a developing situation.

London and Hong Kong are in full bubble-risk territory while Sydney, Vancouver, San Francisco and Amsterdam have significantly overvalued prices compared to their long-term normal points, but valuations are also stretched in Geneva, Zurich, Paris and Frankfurt and, to a lesser degree, in Tokyo and Singapore.

New York and Boston are considered as fairly valued, while Chicago is considered as undervalued relative to its historical references.

This situation could be of importance for long-term investors because once these markets will start (and they will) to correct, they will be large in value and we’ll have a global situation on our hands that could easily spread to other markets.

Again, the situation looks less vulnerable in the U.S. But, alas, it is still vulnerable indeed,

In this context, it’s also an undeniable fact that everywhere house prices have decoupled from local incomes, which has created situations of “unaffordable housing” and in turn has caused a high dependence on foreign demand that, if that should weaken, will cause a substantial weakening of the price drivers.

Of course, rising interest rates, which are coming at a very slow pace, will cause price dislocations in various housing markets all over the globe.

Maybe we can now see the reason why Chicago-based Equity Residential, chaired by Samuel Zell, has decided to sell a nice chunk of apartments for $5.37 billion and cash in the profits.

As the old saying goes, “Only profits in the pocket are real profits.”

Meanwhile, the FOMC added in this week's policy statement a specific reference to their next December 15-16 meeting that reads, “In determining whether it will be appropriate to raise the target range at its next meeting, the committee will assess progress — both realized and expected — toward its objectives of maximum employment and 2 percent inflation.” 

When we compare this with the September 17 statement, (“In determining how long to maintain this target range, the committee will assess progress — both realized and expected — toward its objectives of maximum employment and 2 percent inflation.”), this points to a first rate hike in December, at least in my opinion, unless we’d get really disastrous news on employment or inflation in the meantime.

The first estimate of GDP growth during Q3 that came in at 1.5 percent, which represents an average rate of about 2 percent on a 12-month basis, will certainly not alter the Fed’s clear intention of starting its way to normalization while there is still time to do so.

So far, we could say the real GDP growth rate in the U.S. remains acceptable, but it could be better, no doubt about that, but it remains at the best level among the most important "developed" economies in the world.

This situation was underscored again by the Bank of Japan’s (BOJ) semi-annual “Outlook for Economic Activity and Prices” and while the BOJ kept its monetary policy unchanged, it cut substantially its GDP growth (0.8 to 1. 4 percent in 2015, down from 1.5 to 1.9 percent only 3 months ago) and the CPI (0.0 to 0.4 percent, down from 0.3 to 1.0 percent 3 month ago) forecasts while stating risks to the outlook for the economy and prices remain skewed to the downside.

I’m not saying anything new when I say that many investors have some kind of an insecure feeling about how this “QE-world” we’re living in (where the central banks have more than tripled the global monetary base since 2008) is going to change once the Fed starts hiking its interest rates, albeit at a very slow pace.

No doubt, there are serious risks out there and big-value adjustments in various markets are to be expected.

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HansParisis
No doubt, there are serious risks out there and more or less big value adjustments in various markets are to be expected.
investors, profits, fed, rates
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2015-46-30
Friday, 30 October 2015 10:46 AM
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