Where's The Next Housing Bubble?
Housing prices in the United States crested in 2007, following nearly a decade of unprecedented increases fueled by a perfect storm of easy credit conditions, sub-prime lending, predatory lending and fraudulent underwriting practices. When the housing bubble burst, the consequences were far reaching, affecting home values, home supply retail outlets, home builders, foreclosures and the mortgage, credit, hedge fund and foreign bank markets. The burst has been blamed for causing the worst financial crisis in the United States since the 1930s' Great Depression. The United States, however, might soon have company as other housing markets throughout the world are riding bubbles that may be headed towards a burst. (Home price appreciation is not assured. Can you withstand the volatility in this market? Check out Why Housing Market Bubbles Pop.) TUTORIAL: Exploring Real Estate Investments
Housing prices in Brazil have nearly doubled in the last three years, raising concerns that a bubble is forming in this sizzling emerging market. The country's second largest city, Rio de Janeiro, is gearing up to host the 2014 Soccer World Cup and the 2016 Summer Olympics, both huge boosts to economic activity and the housing market. Rio, which is expected to be among the world's largest economic centers by 2016, has plans to pump billions of dollars into sports-related projects - from stadiums to airport renovations.
Brazil's economy grew 7.5% in 2010, supported by record high employment rates and strong consumer confidence in its growing middle class. The mortgage market has hopped on board this economic stability, making homeownership viable to people who in the past were unable to secure a mortgage. Consumer debt, however, is high with mortgage rates nearly triple those in the United States, and credit card interest rates hovering around 30%. This influx in credit, coupled with the hot real estate market, raises concerns that Brazil's housing market is headed for a bust.
China's housing market has drawn concerns as its investment in residential property represented 6.1% of China's gross domestic product (GDP) in 2010. This is the same level that the United States reached in 2005, just before the housing market peaked. China's property prices grew 6.4% from 2009 to 2010. The Chinese government is implementing regulations to thwart a bubble burst, including increasing the minimum down payment for the purchase of second homes, price targets on new properties and a ban on third mortgages. Despite these efforts to reduce the risk of a housing market bust, the market may be at risk, as daily property sales are currently about half of what they were six months ago, while housing production continues to rise.
The housing market in France has been climbing, with home prices rising close to 9% on average in 2010. Paris, the city of love, saw price increases of 18%. Fixed-rate mortgage lending skyrocketed 73% in February over the previous year, causing the Bank of France to advise banks to cut back on lending. Low mortgage rates, tax rebates to encourage housing investments and a potentially mandatory higher retirement age have all triggered to more buying and higher prices. Certain markets have already begun to show signs of cooling, with real estate prices dropping 7% in the first quarter of 2011 versus the last quarter of 2010. (Bubbles are deceptive and unpredictable, but by studying their history we can prepare to our best ability. See 5 Steps Of A Bubble.)
A strong international presence has inflated the cost of housing in Haiti. Even before the devastating January 2010 earthquake, Haiti's market was largely driven by foreign organizations residing in the small country. After the earthquake, the impact was magnified as more non-governmental organizations (NGOs) from throughout the world came to Haiti's aid. These NGOs and their staff are able to pay higher prices for housing and other consumer goods, and prices have gone up accordingly.
In Port-au-Prince, the capital of Haiti, which that lost thousands of housing and commercial properties during the earthquake, rental prices are currently five- to 10-times greater than before the earthquake. Prices will likely continue to rise as real estate investors, agents and homeowners try to profit while they can off the wealthier NGOs. The impact to the general population, however, is negative, as many local residents are no longer able to afford housing.
From 1997 to 2007, housing prices in Sweden nearly doubled; from 1996 to 2007, prices nearly tripled in five of Sweden's eight regions. The housing market, which gained more than 10% during 2006 and 2007, continued to climb during 2008 and 2009, even though Sweden's economy had entered a recession and unemployment rose. Interest rates as low as 0.25% sparked buyer interest, and though tougher mortgage lending rules were put in place to avoid a housing crisis, they have had a small effect against Sweden's housing supply shortage. And as economics 101 teaches us, if housing is in high demand and short supply, the prices will go up.
The Bottom Line
Real estate markets are dynamic, responding to interest rates, unemployment, consumer confidence, supply, demand and even natural disasters. The United States suffered its most significant financial crisis since the Great Depression - largely because of its housing market's boom and bust. Other housing markets around the world have enjoyed extended rallies that may come to an end as economic and regulatory conditions change. Though the fate of these countries is far from sealed, factors indicate that any could become the next housing bubble. (From lenders to buyers to hedge funds, it appears everyone has blood on their hands. Refer to Who Is To Blame For The Subprime Crisis?)