Housing Bubble COLLAPSING?! What You NEED To Watch!!

The pandemic lockdowns and resulting Easy money created a lot of bubbles Bubbles that have recently been Significantly deflated thanks to the Fed’s monetary policy reversal Well not all bubbles One that has been slow to react to the Changing market conditions appears to be The housing market Now many perceive the housing market to Be more resilient than stocks bonds or Crypto But if there’s anything 2008 has taught Us it’s that bricks and mortar can be Just as frothy So Are we heading for a massive correction Well that’s exactly what i’ll be looking At today don’t go anywhere [Music] Okay so this is the coin bureau okay as You can see very spacious fantastic Views over the whole landscape of Finance educational and objective Content as standard super high levels of Research and 100 Hype free that’s right now i do need to Warn you though that there’s no Financial advice here so if you are in The market for that you’ll need to look Elsewhere okay Some lovely additional features too so If you tap that subscribe button down

And that bell icon down there then You’ll automatically get alerted every Time another video appears on the Channel yeah i know It’s a really nice touch ain’t it uh What else there’s also timestamps just Down there as well yeah a lot of places Are putting those in now really really Classy touch if you ask me Okay so have a look around see what you Think any questions give me a yellow oh Uh yeah just to let you know there is a Resident crypto expert too comes with a Place yeah name of uh Guy that’s right yeah apparently very Well house broken pretty good temper no Problems reported okay so i’ll leave you Guys to have a snoop around shall i okay Great Estate agents say don’t you just love Them Now the pandemic came at a weird time For the global housing market it came When the fundamentals of the market were Already slanted towards a price Appreciation For example it happened to coincide with Generational shifts for large groups of People not least of which was Millennials Now a large proportion of these people Were starting to house hunt this meant That you had a great deal of natural Housing demand coming to the fore

Some were looking to move out of big Cities into the suburbs others wanted to Start families and own their own piece Of the american dream But they all came at about the same time In the housing market’s life cycle And this natural demand for housing Became pronounced in the u.s and Elsewhere However supply was not as readily Available And this is for two principal reasons Firstly the phenomenon of people staying In their homes for much longer the Number of people who’d lived in their Homes for more than 20 years went from Just seven percent in 2005 to a full 25 Percent in 2020 So there were fewer people putting their Houses on the market On top of that there’s also the fact That the construction of new homes has Been lagging in recent years That’s because many of the house Builders who were hit hard by the 2008 Crash just haven’t recovered General shortages of skilled labor also Contributed to this supply crunch and Naturally this imbalance between housing Demand and supply led to an increase in Prices And this was before the pandemic rolled Into town Kovid’s unwelcome entry into our lives

Dialed this imbalance in the housing Market up to 11. or more specifically The reaction by governments and central Bankers dialed it up Firstly although the shutdowns led to One of the biggest drops in employment In economic history this was Supplemented by generous fiscal measures Like stimulus checks and unemployment Grants Therefore household income didn’t Collapse as much and as a result didn’t Crash housing demand in fact the Policies of the central bankers Supercharged that demand That’s because in order to stimulate the Economy the fed and other central Bankers dropped the fed’s fund rate down To zero This obviously meant that interest rates Throughout the broader economy also hit Near record lows That included rates on the mortgages People used to buy homes Savvy millennials saw this as their Chance to finally get on the first rung Of the housing ladder borrowing was Cheaper than ever so demand went through The um Roof And over on the supply side things were Also looking much tighter that’s because Even fewer houses were being built Firstly when we had those rolling

Lockdowns building companies could not Start work either because of the Restrictions or because of a shortage of Workers And even if they were able to start Building procuring materials became much Harder Thanks to massive supply chain Disruptions these materials became Scarcer and more expensive Basics such as lumber and piping became Commodities The convergence of this hot demand and Limited housing supply meant that prices Went skyward you can see that here with This chart prices were shooting up Across the board with those in some Areas reaching unprecedented levels Now this situation was of course not Confined to the us as housing markets in A number of other countries were also Rallying for similar reasons But it wasn’t until earlier this year That these housing price rises started Ringing alarm bells About two months ago researchers at the Dallas fed released this paper which Claimed that signs of a u.s housing Bubble were appearing It basically took a look at real house Prices i.e adjusted for inflation over The past two years and showed that these Were higher than fundamentally justified One of the first charts to look at is

This one over here which tries to give An idea of u.s quote housing exuberance At the top is the real house price index That had been based at 100 in 2005. As you can see real house prices are Higher now than they were in 2005. Below that they’ve plotted a chart with Their real house price exuberance Indicator It’s based on recursive right-tailed Unit root testing and if that sounds Complicated it’s because it is if you Want to dig into it i’ll leave a link to The paper below for some light bedtime Reading Anyways they’ve plotted this indicator Together with the bounds of the 95th Percentile Periods where the indicators are above The 95th percentile can be viewed as Periods of rather extreme exuberance From a statistical perspective As you can see we’ve been above the 95th Percentile in the last three quarters Since 2021. The only previous period where it was Significantly above the 95th percentile Was back in the 2000s we all know what Happened towards the end of that decade So that’s a little alarming But there are other benchmarks that they Look at including the price to rent and Fundamental price to rent ratio The former is straightforward enough but

The latter looks at a benchmark for a Fundamental price They try to get a proxy of this by Running a discounted cash flow analysis On the monthly rental payments The main idea here is that if the price To rent is much higher than the Fundamental price to rents markets are Overvalued As you can see from the top of the chart Here the price to rent is running way Hotter than the fundamental price to Rent A divergence not seen since 2008. They’ve also done the same exuberant Statistical analysis here and you can See that these are far from ordinary Now one more bubble indicator that they Look at is the price to income ratio Which is also self-explanatory if prices Are rising faster than incomes then it’s Becoming less affordable in general now While these indicators are not yet in The exuberance phase over here you can See that they are rising quickly It’s also important to point out that in This time period we also had a surge in Real disposable income as a result of Those pandemic measures The authors point out that if these Rises in household income turn out to be Transitory and monetary policy starts to Reverse these disposable income levels Start dropping and hence could further

Drive it into over-exuberance territory So based on this analysis there do Appear to be signs of housing market Trouble brewing The fact that this report came from a Branch of the fed is also particularly Concerning And for those of you not based in the us I wouldn’t breathe a sigh of relief just Yet That’s because these researchers also Analyzed the broader global housing Markets and were similarly concerned That they were running into a quote Fever Now i’ll leave this as well as their u.s Housing market analysis in the Description for you to read later Definitely worth a gander But since that report things have Changed quite considerably in the global Macro space And with these changes have come signs Of housing market cracks Perhaps one of the most important Developments since the pandemic housing Boom has been a sharp reversal in Monetary policy As we’ve covered a number of times on This channel the fed was caught Flat-footed by inflation and has decided To completely reverse course Since march the fed has raised rates Twice to a total of 75 basis points

These rate increases will naturally Impact on interest rates across the Broader economy The more it costs for banks to borrow From the fed the more those banks will Charge for a mortgage To give you an idea of how much higher Mortgage rates have risen at the Beginning of the year the fixed rate for A 30-year mortgage was sitting at 3.29 Percent Today it’s as high as 5.44 These are the highest that they’ve been In over 10 years Translated into average mortgage Payments this means that the monthly Payment required to buy a home has risen By 50 percent since september This means buying property has become That much less affordable for those same Millennials who were driving up the Market in 2021 This would help explain the fact that Mortgage applications in april were only 50 percent of where they were this time Last year Fewer people applying for loans means That there are naturally fewer buyers In the same month sales of new u.s homes Plummeted by the most in nearly nine Years and this fall in sales has already Started to impact on the prices that Agents are seeing homes being sold for In some of the hottest metros in the u.s

Some sellers are having to do the Unthinkable except offers below asking On top of that it seems as if the glut In building materials supply chains has Eased up somewhat one of the main Drivers on the supply side in 2021 was Those exorbitant lumber prices well a Few weeks ago these prices reached their Lowest level for the year More building supplies on the market Means cheaper inputs and therefore lower Prices To quote economist ian shepardson quote The party is over Now i happen to agree with him yes you Have the stats to back it up but you Also have to consider how much more Rates are likely to rise The fed has made it clear that it is Going to do whatever it takes to stave Off inflation and that will mean some Pretty aggressive rate hikes If the fed’s fund rate goes over the 3 Level that some are expecting that will Make mortgages prohibitively expensive So are we likely to see a replay of the 2008 housing crash Well Not quite While the u.s property market is indeed Due a correction the main difference we Have in today’s market is the fact that Homeowners are a lot more creditworthy If you cast your minds back to the 2008

Financial crisis one of the biggest Contributors to the housing contagion Was the prevalence of sub-prime lending People with bad credit ratings were able To get home loans as easily as they were Able to get credit cards In some cases the banks didn’t even care About the credit ratings of the Borrowers That was because as long as housing Prices were going up so too was the Value of the collateral if a borrower Could not afford to make their payments The bank could just repossess the house And flip it at a profit Predatory lending practices abounded Perhaps one of the most prevalent was Deceptive adjustable mortgages those That appeared to have really low Interest rates or payments initially but Which would significantly ratchet up After a few months Naturally these rates went to levels That the borrower could not afford but The banks didn’t care as they could Always sell those houses on or so they Thought And while the issuance of adjustable Rate mortgages has recently shot up to a 14-year high of nine percent it’s still A long way off from the peak 35 percent That we saw in the last cycle This means that although interest rates Are rising they are unlikely to lead to

Mass foreclosures that would nuke the Housing market One final thing that does not appear to Have taken place in the most recent Housing boom but that was seen in 2008 Is additional leverage Basically back then people were able to Use the equity that they had in other Home loans as collateral for down Payments on new homes This layered on the affordability Moreover in response to the 2008 crash The government instituted a number of Guard rails that would help prevent These types of unsustainable loan Issuances going forward These have by and large kept the Mortgage issuers in check Finally the demand drivers in this Recent housing boom albeit frenzied were Powered by underlying fundamentals People were looking for houses to live In During 2008 people were often merely Buying up house upon house because they All thought that house prices would only Ever go up No one had ever experienced a broad Crash in u.s housing so they assumed the Party would never end So it appears that we may indeed escape A great housing crash in the u.s But that doesn’t mean that there aren’t Some seriously hot and dangerously

Tilted housing markets out there so Let’s take a look at them shall we What i was relatively surprised to learn Is that in the context of global housing Bubbles u.s cities very rarely feature As the most overvalued last year Analysts at bloomberg looked at Countries with overvalued housing Markets and tried to devise what they Called a bubble rank In that list the us came seventh behind Countries like denmark the uk norway Sweden canada and new zealand Who would have thought that new zealand Had the largest housing bubble in the World But ask any kiwi and they’ll tell you About how expensive cities like auckland Have become over the past two years In that period house prices have risen By over 25 percent and the average house Price in the city was close to 1.4 Million new zealand dollars almost a Million u.s In terms of affordability that’s 35 Times the median income Part of the reason why economists are Worried by the new zealand housing Market is because it has been propped up By a great deal of debt and it’s those People with the most debt who are doing Most of the home lending naturally Take a look at this chart over here it Shows the percentage of lending that

Flows to those people with debt to Income ratios over six times i.e heavily Indebted folks In new zealand as a whole it’s 56 Percent while in auckland the number is 68 What this means is that these debtors Are going to be vulnerable to an Increase in interest rates The reserve bank of new zealand has been Pumping those rates and the benchmark Rate is now already at two percent Fixed mortgage rates in new zealand have Already risen by over 250 basis points According to macquarie This is having an impact on kiwi’s Capacity to pay for those mortgages Now take a look at this graph over here It maps the mean national price of a Home with that of the capacity for People to pay a two-year fixed mortgage Until about halfway through 2021 they Were both trending up However something changed after that Notice it Yep the capacity to pay for a mortgage Reversed course and started falling Fewer people able to pay mortgages means Fewer buyers which means lower prices This is already beginning to take shape In the country as the for sale signs Start to pop up Many economists are predicting that this Could be the beginning of the bubble

Bursting with falls of over 10 percent Expected this year This is troubling of course because Houses are the collateral for the banks That have been issuing those loans But what’s even more of a concern is That this could be seen as a canary in The coal mine for all those other Housing markets that have been driven by Similar forces The country that came second after new Zealand on that bloomberg bubble list Was canada Now this should be less surprising Because it’s been known for quite some Time that canada has had one of the Hottest housing markets out there Prices seem to keep going up at rates That just don’t seem sustainable Last year in a similar study ubs looked At some of the world’s biggest housing Bubbles they ranked these in their Global real estate bubble index linked To below As you can see the canadian cities of Vancouver and toronto were both in Bubble territory the latter was actually The second on the list The average home price in canada is 816 000 canadian dollars which is 50 percent Higher than the equivalent u.s home Price when converted to u.s dollars In the past this growth has been driven By demand from overseas buyers looking

For a bolt hole However in 2018 the government Implemented a foreign bias tax which it Hoped would cool the market down While it did have a temporary impact in 2018 and 2019 the pandemic brought with It a whole host of macro factors that Supercharged the housing market afresh Ultra low interest rates thanks to lacks Monetary policies led to a rush of new Home buyers taking out mortgages On top of this the lenders placed less Stress on creditworthiness never a good Idea What’s even worse is the fact that last Year a large percentage of those who had Been taking out mortgages had been doing So into variable rate ones In october last year the market share of New variable rate mortgages surged to 51 Now it’s worth noting that this is the Highest it has ever been since the bank Of canada began tracking the data in 2013. While rates on adjustable rate mortgages Are generally lower than those which Will pay on fixed rate mortgages they do Eventually adjust up If the interest rates at the end of the Initial term are much higher you face a Massive jump in mortgage payments This could make them unaffordable and Lead to repossessions and foreclosures Interest rates are on the way up and the

Bank of canada increased its base rate To 1.5 percent at the beginning of the Month Now if you like me believe that we’re Heading for a high rates environment for Quite some time then that should alarm Those borrowers already these interest Rate hikes and the withdrawal of Government stimulus are having an impact On housing prices In may of this year we had our first Ever fall in canadian home prices as the Benchmark home price fell by 0.6 From the month before On top of this sales plunged by 12.6 in The same month Quite unsurprisingly those markets that Saw the most gains during the pandemic The toronto suburbs had the biggest Falls in the month Again falling collateral is never good For a bank’s balance sheet and it’s well Known that canadian banks have outsized Exposure to the real estate sector So will we see a broad housing collapse Here I don’t know but if it does happen at Least it could make housing affordable For the average canadian but to the Detriment of current indebted homeowners For every winner there’s a loser Now that’s it for most of today’s video But i’ll leave you with a few thoughts Something that struck me the most is

Just how much government policies in the Wake of the pandemic have impacted all Asset markets The real estate market is no different a Global bubble that’s been propped up by Easy money and the allure of owning your Own home The u.s real estate market is again in Bubble territory and there are many who Fear the inevitable pop Higher interest rates more inventory Lower input costs it’s the complete Reversal of the conditions that we Witnessed in 2020 and 2021. Now while this reversal is indeed Concerning for those in the u.s it’s Likely that we could avoid a wider scale Housing meltdown As long as those greedy bankers don’t Start originating repackaging and Betting on subprime debt we could emerge Unscathed here’s hoping of course Now of course as we have covered here The u.s is only one housing market and There are others that appear way more Overvalued by numerous metrics Canada and new zealand’s markets have Been driven by many of the same factors That drove the 2008 housing bubble Indebted borrowers over-extending Themselves on cheap credit both of these Housing markets now appear to be Adjusting to the painful reality Now of course these were just two

Examples of countries with hot markets But they’re not the only ones property Markets in australia sweden norway the Uk and germany are also in bubble Territory So as central bankers start pumping the Brakes and raising those rates we will See exactly which housing markets were The most fundamentally unsound As warren buffett likes to say it’s when The tide goes out that you see who’s Been swimming naked And that’s it for my video on the global Housing market but i’m really keen to Get your feedback do you think that We’re in bubble territory any canucks or Kiwis care to opine on my analysis Do you enjoy this type of content so Fire your comments down below oh yes and While you’re down there something that You cannot miss is my socials page it’s Here where i have the official links to All the places with exclusive content That you’re not getting here these Include My telegram channel with my daily market Analysis my twitter with news and Channel updates my instagram with some Behind the scenes action my tick tock For shorter flicks and general banter And last but not least my email Newsletter my once weekly view on Everything from the hottest coins to Exciting trends

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