Signs of the Real Estate Bubble Bursting

I wrote about the topping of the real estate markets around the world back in October. I received quite a number of emails from readers confirming their concerns of price drop in the near future. Some even scared of a crash in their local housing markets. It is important we look at it objectively as real estate markets is way more complicated than the fluctuation of stock prices.

First, real estate markets do not drop at the same time around the world. Second, the magnitude of the drops depends heavily on the specific price range and location of the properties. Third, those places with bubbles in place will burst harder than the other places.

Hong Kong is showing the first sign of its real estate bubble being in trouble. The overall sales activities has dropped significantly. It is the equivalent of seeing rising prices in a stock with no volume on the new highs. The price may continue to drift higher but there is really no support from the current level. It implies any further rise in real estate prices in Hong Kong may not be sustainable and can easily snap back down to the current level.

Australia is one of the hottest housing markets over the past few years but its real estate markets have experienced a drop in prices across the board. Some people blame the correction in price on the capital control imposed by the Chinese government on its citizens. Is it just a slow down or could it be something more serious?

In Canada, the doubling of the land transfer tax and significant increase in property taxes at city level in 2016 will surely impact real estate prices. This raises an important question whether it is a new trend for the governments to tax more on real estates in coming years.

The rise of the real estate markets since 1940s in the biggest economies is simply a function of the introduction of mortgages as a financial service. The existence of mortgage artificially inflated the supply of buyers by many folds hence the rise of the housing prices. Since income level for majority of people in the world has not kept up with the rise of asset prices over the past 10 years, unless governments worldwide loosen up mortgage requirements, one of the most important driver of housing prices will not be able to keep up.

For some countries, the real estate prices may drop a bit later because of the relative weaknesses in their currencies against the US dollar. For example, Canadian dollar is heading towards new low against US dollar in coming years. This will create short term demand of Canadian properties from people who earn US dollars. At the end though, as worldwide economy slows down, such demand will also dry up.

Japan housing market dropped continuously for 20 years until recently. It is the likely outcome we are going to witness on global scale. It is not something to hope for.

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