When Will Property Prices Rise Again?

One of the worst global economic crisis in recent memory resulted from an unsustainable asset price rise around the world during the first decade of this century. While stock and commodity bubbles are relatively common, it is invariably the real estate bubbles that do the greatest damage to the economy. Ten years after that damaging turn of events, property prices are again looking up. Is it time to rejoice... or should we be cautious....
When will Property Prices Rise Again?
Source - Wikimedia Commons (https://commons.wikimedia.org/wiki/File%3AU.S._Commercial_Real_Estate_Property_Price_Index.JPG)

The last global economic crisis had its origin in an asset bubble which led to the burst in 2007. Subsequent fiscal and monetary stimuli provided by governments all over the world during the last decade have not only mitigated the asset bust, but also begin to reflect in another round of property price build-up. The economic growth have also picked up around the world. However, it would be important to remember that the excess liquidity that had been pumped in during the phases of quantitative easing has not been reversed as yet.

The Million Dollar Question

As governments all over the world

kept pumping in more and more of money in the economy, waiting for signs of recovery, the question that was repeatedly been asked was whether the systemic problems in the economy have got resolved. One that was being monitored was the reversion of property price fall.

The million dollar question that everybody seemed to ask was, “when will property prices begin to rise again?”

But the last few years have provided a reasonably assuring response to that question. In most economies, the prices have not only come back to the long term normal, they are also showing signs of healthy revival, as evident from property price rise in major economies around the world.

Property Prices in United States

In the United States, which suffered most in the last crisis, the annual property rise in 2016 was around 6%, as measured by the S&P/Case-Shiller seasonally-adjusted national home price index. This comes on top of healthy annual price rise of 5 to 6 per cent every year since 2012, apart from a higher than usual 10.74% in 2013. One important observation in US property prices is that the price of commercial property seems to have risen more than residential properties during the last few years, unlike the asset bubble in residential housing prices ten years back. They also seem to have been affected more by the quantative easing and have already risen significantly over the maximum levels reached in 2008.

Property Prices in China

Compared to the United States, the property prices have been far more volatile in China, where they first rose astonishingly, by over 30% in 2008, only to suffer an acute asset price burst and fall by the same margin within the next year. After about five years of stagnation, the Chinese property prices have been looking up once again since 2014, but the real recovery seems to have come up in the last two years, with another massive 25% build-up in property prices. The Chinese property market is once again acquiring speculative characteristics, and poses dangers of another setback, though with ten years of growth the cumulative demand is likely to hedge against any imminent threats of a burst.

Property Prices in Germany

Property prices have also been volatile during the last decade elsewhere, thanks largely to the speculators relying on the effects of quantitative easing. In Germany, which was relatively immune from the asset bubble problem in 2007-08, has seen property prices going up and down in a more or less cyclic manner since then, with the third and most recent cycle currently in process. Each of these cycles has seen a ten per cent rise, and on both earlier occasions, the rise was followed by an almost immediate fall in prices. This time, however, with global economy sharing similar asset price boom, and with greater consumer confidence, the possibility of prices sustaining seems to be higher. The peak reached this year is also somewhat flatter and inspires greater hope.

Property Prices in Japan & India also Improve

The other two large economies of the world, Japan and India also showed positive signs in terms of

property prices. Both of these economies had their own peculiar problems to deal with. And seemed to be over them.

In Japan, property prices have been largely stagnant since the beginning of 1990s, after Japan witnessed one of the worst asset bubbles in real asset prices in recent economic history. It is estimated that during the peak of that bubble, the total market price of land in Tokyo exceeded the total market price of all land in the United States! As one would expect, the consequent asset burst left a very large number of stakeholders holding expensive real estate, and the resource misallocation caused two lost decades for its economy. It is only in the last few years, that the Japanese economy is beginning to grow again, and the same is indicated by the property prices, which grew almost 5% in 2016. This bodes well for Japanese economy, as it indicates that property related mess may have finally got cleared.

In India, which has also been experiencing a sustained asset inflation since more than a decade, it was an unusual event, which brought a relative setback – the ‘demonetization’ of currency. In an economy, where a lot of property transactions were probably being made in cash, the unavailability of cash made a huge difference, bringing the property prices down, probably for the first time in this century. However, as per recent indications, the prices are growing once again, though the growth is still sluggish by Indian standards.

Are the Real Estate Markets Healthy Now?

For anyone who would have analyzed the last financial crisis, the recent property price rise is also an occasion to ask as to whether everything is fine. For now, that is how it seems to be in most economies of the world. The property prices are now recovering from the decade long stagnation, and though some signs of asset inflation are already visible in financial assets, the property prices do not seem to be in a bubble as yet.

Can another Asset Bubble be in the Making in Real Estate

Some of the factors that led to the 2007 asset bubble still exist, like the persistent trade deficit of the United States with some of its trading partners, like China. This creates vulnerability for asset inflation, both in United States and China, because the excess foreign reserves have a tendency to come back to US economy as investments in treasury. However, quantitatively a lot has changed between 2007 and 2017. The oil import bill of United States has been slashed, and the fall of oil prices is limiting the flow of petrodollars in to US treasuries. China is now more interested in leveraging its asset to buy real properties in the rest of the world.

The property prices, even where they have risen considerably, like in China, may still not be at the level of a bubble that can go burst. However, there is no denying the fact that asset bubbles, particularly in the property markets have a tendency of building up, until the excess liquidity generated by quantitative easing is mopped up.

It may also be worth noting that economic history tells us that real estate bubbles have a notorious tendency to recur every 18 years.

We are still halfway away from that limit!



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