Friday, February 26, 2010

The Globe of Bubbles!

One of the more interesting and most dramatic features of the housing bubble days was how pervasive and broad the mania was, encompassing a multitude of regional housing markets across the United States and around the world.

In fact, that was one of the primary arguments that prescient author John Talbott outlined out in his early 2000s books on the housing bubble, as he asserted that the sheer fact that bubbles were occurring in so many world property markets simultaneously likely implied that local supply constraints were NOT the cause of the significant house price appreciation, as many had argued.

Talbott accurately concluded that relaxed lending standards and a global credit boom were the real causes of the majority of outstanding property price appreciation.

Today, post-housing crash, we are still seeing property markets moving together somewhat as governments around the globe scramble to prop up quickly deflating housing assets.

One notable example can be seen by comparing the S&P/Case-Shiller index to that of the two popular U.K. home prices indices.

Today, Nationwide released the latest data confirming that U.K. property prices have fallen back a bit as was suggested by the January Halifax release.

Now, all three series, are showing a similar trend of a great decline, a government sponsored bounce and now indications of continued price deflation.

The following chart (click for dynamic full-screen version) shows S&P/Case-Shiller Composite-10 series along with the Nationwide and Halifax U.K. series.




    The views of Talbot, as you characterize them (I have not read the book) are both “right on” and “way off.” Anyone who took his advice to sell at the peak of the bubble owes him a good deal. On the other hand, you indicate his view that “the hyper inflated run up in home prices…” occurred in “ virtually every major metro housing market” over the last 10 years. That is simply not true, as our 6th Annual Demographia International Housing Survey indicates. Indeed, in the three fastest growing metropolitan areas in the high income world, Atlanta, Dallas-Fort Worth and Houston, there were only modest price increases relative to incomes or inflation. (See:

    Approximately one-half of the major US markets experienced little in house price increases. Each of these has far less restrictive housing regulation than where the prices escalated to unprecedented heights. In all of these markets, land use regulation is overly prescriptive. This is not to suggest that the fundamental cause of the bubble was not easy money and profligate lending. However, in that environment, the bubble occurred only where land use regulation was overly prescriptive. Had more traditional regulation been in place in all of the nation’s housing markets, it is likely that the bubble would have been avoided, because we would have built our way out of it, as we did in one-half of the country.

    As for the pervasiveness of the bubble outside the United States, the data shows the same relationship. Overly restrictive land use regulation exists in all bubble markets of not only the US, but also the UK, Canada, Australia, Ireland and New Zealand. In some cases this is the result of national land use policies (such as in the UK) and in some the result of nearly duplicate regional policies (such as in Australia).

    It is all a matter of simple economics. Where the supply of any good or service is constrained such that demand exceeds supply, prices will tend to go up, all things being equal. This view is shared by leading economists as well as members and former members of central bank boards. See:

    Wendell Cox
    Principal, Demographia
    Visiting Professor, Conservatoire National des Arts et Metiers, Paris