Property bubbles that have burst in the past.
What’s on our mind: Lending data down again.. while we look at the Japanese, US and Irish housing bubbles that have burst in the past.
What happened this week: Lending for housing down 3.7% (Data is for November 2022),US inflation at an annualised 7.3%.
What we are watching next week: Aus/USA unemployment data.
Prelude:
What’s on our mind:
Housing bubbles are nothing new.
Over the last 40 years, we have seen multiple housing bubbles inflate and then burst in devastating fashion.
First was the Japanese housing bubble which ran from 1985 to 1991.
The price of land in some parts of Japan over that six year period increased by ~300% and at one point land that the imperial palace sat on was worth more than the entire state of California, USA.
The Japanese housing bubble started to collapse in early 1992 and housing prices fell almost ~80% from their peak and took over 30 years to recover.
Second was the US housing bubble which ran up until ~2008.
While the house price falls were more modest, the US housing collapse had international consequences causing the 2008 Global Financial Crisis (GFC) and almost taking out the entire global financial system with it.
The shockwaves from the collapse were so strong that the crisis froze credit markets globally and brought down housing markets across the UK and Europe with it.
In the US, housing prices fell ~30-40%, and one of the country's biggest banks, Lehman Brothers, went bust.
In Europe, the Spanish housing market collapsed, and In Ireland, the entire economy almost came crashing down, with property prices falling ~50-60% from their peak.
While bubbles have burst in the past, they all seemed to share some key characteristics during the forming years.
The characteristics we think are most important are as follows:
Low-interest rates - In the years leading up to the collapse, rates continue to fall and get lower.
** This was the case in Australia in 2020-2021, with rates hitting the lowest level in Australian history at 0.1%.
Easy credit - Getting a giant loan becomes easier and more accessible to the general public and credit grows at record rates.
** Australia also had this. Credit growth also hit record levels during the 2020-2021 euphoria phase - the following chart illustrates how wild things got.
Exponential rises in housing prices - Housing prices start to rise by a higher rate than they have in the past, primarily due to speculative buying.
** This needs no explaining, we are sure everybody remembers the 24% increases in prices in 2021.
Last but not least, all of these bubbles shared a similar fate.
Credit growth started slowing, people started to shy away from mega mortgages, and the proverbial music at the party stopped playing.
On this front, we are seeing credit slow at an almost record pace in Australia, with total new loan commitments down ~24% from its January 2022 peak.
The question now is - how will all of this end?
Will we see a Japan-style slow grind to the bottom or a US/Europe/UK-style collapse?
For those interested and wanting to get some more context on the three bubbles that collapsed in the past, below is content that we think gives a great high level overview of the Japanese, Irish, and US housing collapses:
USA:
The Hollywood film “The Big Short” is a great place to start if you are completely new to the US housing bubble with a slightly more entertaining way of explaining what happened.
This is probably a good place to start especially considering the US housing collapse was perhaps the most brutal in terms of consequences - almost bringing down the entire global banking system (Global Financial Crisis of 2008).
Japan:
For those who havent seen the documentary ‘Princes Of The Yen’ we highly recommend you watch the following to get an insight into how the Japanese property bubble started.
Based on the book by Professor Richard Werner, a researcher at the Bank of Japan during the 90s crash.
The documentary by Michael Oswald covered the stock market collapse (fell ~80%) and the housing collapse (fell ~84%.
Ireland:
Another great video that helps explain the Irish property bubble and the subsequent collapse is as follows:
Thanks for reading,
Aus_Prop team.