Buisness Insider

13 European Housing Markets Sure Look Like Bubbles

Soap Bubble

Could Sweden or Finland be the scene of the next European financial crisis? It is actually far likelier than most people realize. While the world has been laser-focused on the woes of the heavily-indebted PIIGS nations for the last couple of years, property markets in Northern and Western European countries have been bubbling up to dizzying new heights in a repeat performance of the very property bubbles that caused the global financial crisis in the first place.

Check Out Europe's Housing Bubble Country-by-Country >

Nordic and Western European countries such as Norway and Switzerland have attracted strong investment inflows due to their perceived economic safe-haven statuses, serving to further inflate these countries’ preexisting property bubbles that had expanded from the mid-1990s until 2008.

With their overheated economies and ballooning property bubbles, today’s safe-haven European countries may very well be tomorrow’s Greeces and Italys.

I’ve named this massive multi-country housing bubble “The Post-2009 Northern and Western European Housing Bubble.”

(The Post-2009 Northern and Western European Housing Bubble is a part of the overall Post-2009 Global Housing Bubble or “Housing Bubble 2.0″ that I’ve identified.)

UK and London Housing Bubble

Uk And London Housing Bubble

UK housing prices have nearly quadrupled from the mid-1990s to 2008, briefly fell 20% in 2009 and have since rebounded enough to keep property prices firmly in the stratosphere.

UK property prices are very overvalued, currently valued at 128% of their historic price-to-income ratio and 140% of their historic price-to-rent ratio. [1] In a pattern similar to France, the UK housing bubble (since 2008) has been primarily driven by price gains in the capital city of London.

Prime London housing prices rose a hearty 11.4% in the 12 months to October 2011 [2], up 40% from their post-credit crunch low [3], while most other investment markets fell in a very volatile year.

Like Paris, the city of London has such a strong level of international “brand recognition” and a perceived safe-haven status that wealthy foreign investors are clamoring to buy property in prime areas such as central London.

“London property is the ‘Swiss bank account’ of the 21st century,” says Robin Hardy, an analyst at London investment firm Peel Hunt. Rich people in places like Egypt, Syria and southern Europe are rushing to get their money away from the turmoil, and for want of a better alternative, they are plunking it down in the “millionaire’s playground” of central London. [4]

The nouveau riche of China, India and other emerging markets are also keen on diversifying their wealth into prime Western property markets such as London, Vancouver and Manhattan, while one hedge-fund manager said that London property was a “laundromat for Russian money.”

An entire generation is locked out of the city’s broken and outrageously-bubbled housing markets as the average Londoner would need to triple their salary to £87,000 to buy an average price property. [5]

The prime London property bubble is highly vulnerable to the popping of the precariously-teetering China and emerging markets bubbles as well as job losses and decreasing bonuses for City of London financial workers. [6]

UK and London Housing Bubble Articles List



French and Paris Housing Bubble

French And Paris Housing Bubble

After zooming 120% from 2000 to 2008 and briefly dipping 5.6% in 2009, French property prices have continued their inexorable march higher since late 2009. French property prices are highly overvalued, currently valued at 135% of their historic price-to-income ratio and 150% of their historic price-to-rent ratio. [1]

Though property prices are strongly rising throughout France, the French housing bubble is largely driven by the Paris region, where prices have jumped 18% in 2010 and approximately 10% in 2011, up more than 40% since 2005. Some posh districts in Paris have risen at a 27% rate in 2011. [2]

France’s housing bubble was goosed by a 2009 law that was meant to stimulate the housing market by creating a significant tax incentive for buyers. Mortgage rates that plunged from 6.5% in late 2008 to 3.5% in 2011 were another major catalyst for soaring property prices, causing fixed-rate mortgage lending to increase by 73% by early 2011. [3]

The French property market now has the dubious distinction of being the most overvalued in Europe and the third most overvalued market in the world, behind only Hong Kong and Australia [4], which have property bubbles of their own.

The Paris-based OECD warned that “there is a risk that a prolonged period of easy finance could result in a price bubble,” which may endanger French banks [5], while Hervé Boulhol, the OECD’s France economist, warned against treating French real estate as a safe-haven and that the property market’s powerful rise without a corresponding rise in income “may signal a bubble phenomenon, as a bubble is a disconnection with fundamentals.” [6]

Moody’s also issued a warning that the French property market was overheating and that the least cautious lenders could face steep losses in a more price severe drop. [7]

By October 2012, the French property boom showed signs of an abrupt slowdown, with new mortgage loans dropping 45.8% (yoy) and a 30 to 40% decrease in home sales in Paris and Ile-de-France. [8]

French Housing Bubble Articles List



German Housing Bubble

German Housing Bubble

While Germany was fortunate and sensible enough to have avoided engaging in the 2000s housing bubble folly with the rest of the world, Germans certainly seem eager to make up for lost time.

The European Central Bank’s ultra-low key interest rate, while appropriate for the ailing PIIGS nations, is too low for faster-growing Germany resulting in negative real interest rates and fears of inflation.

As is common in countries with negative real interest rates, German investors are pulling money out of low-yielding bank accounts and investments and plowing it into all types of real estate, causing prices to boom for the first time in a very long while.

Property prices in Munich and Hamburg rose by more than 10% in 2011 [1] , while obscure fields and forests in northeastern Germany’s Uckermark region have soared by as much as 20 to 30 percent. [2]

In September 2012, George Soros said “You have a serious danger of a housing bubble developing in Berlin. It has a lot to do with the flight of capital and negative real interest rates.” [3]

It is too early to determine if Germany is in the midst of a property bubble, but it is certainly a situation that warrants monitoring, especially if there is a temporary improvement in global economic growth and sentiment.

German Housing Bubble Articles List



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MEREDITH WHITNEY: Bankers Are In For A 'Much Ruder Awakening' When It Comes To 2013 Pay

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Bad news, bankers.

Bank analyst Meredith Whitney warned that 2013 will be a "much ruder awakening" when it comes to total bank compensation, she said during CNBC's "Closing Bell" with Maria Bartiromo

"Importantly, whatever happens with bonuses this year will be no indication of what happens next year." 

The reason, she explained, is because in 2009 a lot of people were hired on contracts and the banks are forced to have a higher payout than they would want to have. 

And that's not all the bad news she had. 

Whitney, who has predicted thousands and thousands of layoffs, thinks we haven't even started to see the beginning of those layoffs. 

SEE ALSO: Meredith Whitney's Gone Bullish On Financials >

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The Government Policies That Are Suffocating Entrepreneurs

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There are nearly 5 million small businesses in America, firms with less than 500 employees.

On average, they employ 11 workers each and produce $1 million of output annually.

They account for 60% of job creation, and nearly half of all employment and economic output.

But, says Citigroup, “the US small-firm sector is under substantial stress.”

Small firm employment has declined about 20% relative to large firm employment versus its peak in the mid-1980s — including a 10% drop since the late 1990s.

And the small-firm share of output produced by the private sector has declined to 45% in 2010 versus 50% in 1998.

And, as the chart above shows, the birth rate of new small firms – the number created in a given year relative to the total number of such firms – has fallen to around 8% vs. 10% before the financial crisis and 12% in the 1980s.

Some of the decline can be blamed on short-term reasons.

Small firms make up a good chunk of the construction and real estate sectors, both hard hit by the Great Recession and Not-So-Great Recovery. But longer-term, structural issues also play a role. Citigroup:

First, large firms account for the lion’s share of U.S. exports and, as such, have been better positioned to benefit from the rapid growth of emerging market economies and globalization trends more generally. Consistent with this observation, we find that a depreciation of the dollar systematically raises large-firm employment relative to that of small firms.

Second, we find that large firms tend to be in more capital-intensive industries, which means that these firms have likely benefited more directly from the decline in interest rates that has occurred over the past thirty years.

A third structural headwind appears to have been the ongoing consolidation of the U.S. banking system. This has brought with it a declining role for small banks, which traditionally have been major suppliers of credit to small firms. Our sense is that such structural forces are likely to continue to favor large firms for some time to come.

The requirements of the new healthcare law may prove to be another structural headwind for the small-firm sector.

From a public policy perspective, the key would be to focus on entrepreneurship and the expansion of young firms — they’re the engine of job growth — rather than small firms in general.

Indeed, research from the Kauffman Foundation finds that the fastest-growing 1% of firms typically account for about 40% of US job creation. And of that group, three-quarters are less than six years old.

Given the Citigroup findings, an entrepreneurship agenda might include a) a less concentrated banking system and b) getting business out of the health care business through consumer-driven reform.

Beyond that, perhaps eliminating capital gains taxes on long-term investments and creating a more-skilled workforce. NGDP level targeting might also play a role, as Evan Soltas argues:

Economists believe that firms in the United States are risk-averse, and that’s not a bad thing in itself, but it does imply that nominal instability has real costs in the long run. In other words, if the economy is constantly swinging from boom to bust in NGDP, then if I run a business, I won’t invest as much as I would have if the economy grew with more stability, because I am afraid that if I invest (say, I open a new storefront) and a recession comes, then my investment will lose value. Now expand this consideration of one firm to the entire economy: when NGDP growth is unstable, firms make fewer investments — factories buy fewer machines, merchants open fewer stores, companies hire and train fewer employees, etc. — and what this means is that, in the long run, the economy grows more slowly because productivity increases more slowly.

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