Why housing bubbles can last such a long time and what to do if you really need or want to buy a house in a frothy market.
In this episode you’ll learn:
- How big is the housing bubble in Australia and Canada.
- Why home prices can’t disengage from economic gravity in terms of household income and rent.
- What drives housing price bubbles.
- How algorithms have changed stock investing and increased risks.
Show Notes
Episode 81: When Booms Turn To Bust
Australia Residential Property Price Index – Eight Capital Cities
Grant’s Interest Rate Observer
Canada Housing Market Statistics – The Canadian Real Estate Association
New mortgage stress test rules will block 50,000 people from buying: mortgage group – CBC
Purchase Only House Price Index For the United States – FRED
Six stunning numbers about Toronto real estate and your personal finances – Globe and Mail
United States Home Prices and Values – Zillow
Credit Suisse Global Investment Returns Year Book 2018
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Outside the Box Podcast
Episode Summary
Navigating a housing bubble is often on everyone’s minds. With changing family needs, balancing multiple incomes, and varying environmental factors, finding a great house is a struggle most families face. On this episode of Money For the Rest of Us, David responds to a listener’s question of how to navigate a housing bubble. He explains the idea of “economic gravity,” outlines factors that are influencing the global housing market, and offers solutions to the housing bubble crisis.
A housing bubble cannot break free from economic gravity
David discusses the idea of “economic gravity” on this episode. Simply, over the long-term housing prices can’t be disconnected from the ability of households to service a level of mortgage debt – to successfully make those payments every month. Nobel prize-winning economist Milton Friedman explains, “When (corporate) earnings are exceptionally high, they don’t just keep booming – they can’t break loose from economic gravity.” The same concept applies to home prices. When prices are high, they can boom for an exceptionally long time. But they cannot break free from this underlying economic concept.
Factors that are driving up the global housing market
Housing bubbles are being created across the globe because of a few major factors. Low interest rates, offshore demand for domestic property, influxes in immigration, and interest only loans are all contributing factors to the housing bubble discussed in this episode of Money for the Rest of Us. David draws many parallels between the US housing market and those in Australia and Canada.
Housing markets don’t always align with growing family needs
Joe, the Money For the Rest of Us listener that submitted the question for this episode, is seeking different housing for his family as it grows and shifts. But he’s finding that unfortunately, housing markets don’t always align with growing family needs. Better school districts, larger homes, easier commutes, etc. are all factors that millions of Americans are seeking for their prospective homes. David encourages listeners to consider what type of housing their family can reasonably afford and still maintain the type of lifestyle they desire. You never want to purchase a house that you cannot comfortably afford. To hear more about the housing market in the US today, data on current housing prices across the country, and even more great information, don’t miss this episode.
3 ways you can respond to rising house prices
After considering all the data related to the housing bubble and overall market in your area, you essentially have 3 options:
- You can stay put
- You can move to a cheaper locale
- You can buy, while being patient and prudent
In order to make the most of the housing opportunities for your family, David encourages every listener to consider their personal affordability and examine their ability to handle unforeseen financial stress (loss of a job, medical emergencies, etc.) Navigating a housing bubble is challenging, but this episode of Money For the Rest of Us can help you make sense of all the angles. Be sure to listen.
Episode Chronology
[1:05] A listener poses a question about how to handle a housing bubble in his area[6:47] Current data on the American and international housing bubbles
[10:02] Is the current housing bubble starting to break?
[10:57] What factors are driving the home prices in Australia, for example?
[12:41] Comparing the Canadian housing bubble to Australia’s
[15:45] So what should you do during a housing bubble?
[18:09] Housing markets don’t always align with growing family needs
[21:36] How to combat the factors driving up housing prices
Learn More About Housing
238: The U.S Is More Socialist Than Denmark Regarding Home Mortgages
258: How Financialization Pushes Up Home Prices
317: How To Buy In A Hot Housing Market
Transcript
Welcome to Money For the Rest of Us. This is a personal finance show it’s on money, how it works, how to invest it and how to live without worrying about it. I’m your host David Stein. Today’s episode 211. It’s titled “How to Navigate A Housing Bubble.” I recently received an email from Joe. He writes, “I am a fellow Idahoan. I live in Treasure Valley where all the growth is happening.” Treasure Valley is in the Boise Meridian Nampa Caldwell area, I live in Idaho Falls. There is growth here too, probably not as much as over there though.
He continues, “My wife and I are looking to move up in house but the real estate market is so hot here from all the growth that we are probably going to build to get what we want because inventory is so low. And we would have to do many improvements to the houses on the market to make it the way we would want. I need a place for all my equipment for my business – a bigger garage,” he has a lawn care company. And, he says, “My wife needs a bonus room to do in-home daycare in addition to her being a stay at home mom. I was wondering if you could speak to the real estate market being so hot locally.”
“I think it’s a good idea to harvest equity in our current home and move up now because I do not see it slowing down. We live in the Information Age and all the surrounding residents of other states see us as a cheaper place to live even though it’s starting to become unaffordable for us locals. My wife and I have the ability to do so now but my fear is if we wait with rising interest rates and the massive growth we will soon be priced out of the market.”
That’s a common sentiment. When there is a housing bubble there is that fear of missing out, that the prices are going to keep continuing to rise. Later in a follow up email he said, he wrote, “I could live the Dave Ramsey life and delay for decades and pay off my current home before moving up. I could live the Robert Kiyosaki way from “Rich Dad Poor Dad” and just leverage up and get by on high payments.” He calculated if they built a house his mortgage would double, his monthly mortgage payment from 800 to 1600 dollars.
He continues, “My wife and I bought in 2012 as a short sale and have benefited from our equity which is why our payments are so low.” They’ve experience 100% appreciation in their house since 2012. They bought pretty close to the bottom. “We’re new parents and my wife is lucky enough to have the option to stay home because I have structured my business in a way to allow this when most people my age,” he’s 27, “don’t have the choice and both parents have to work to get by. We’re planning on growing our family, the business aspect and the new home in addition to more space for our planned growth, that’s why we feel we want to move up in house.” So he wants to do some home care or watch some other kids in daycare. I guess room for his business and he says another reason to move up now is because economic fundamentals and other factors make housing more expensive for the foreseeable future in our area.
He mentioned he has a background in economics, that’s his undergrad. He’s taken some masters courses and decided he likes his lawn care business. He just would find that the low level banking financial jobs can get in the area without moving just doesn’t interest him. They have family in Treasure Valley and I want to stay in the area for the foreseeable future. But it goes back to he said, balance and trying to live a full life while not overworking or the inability to have choices we do have in terms of his wife being able to stay at home.
They’re kind of stuck. They’re in a house, they need more room or they would like more room. There’s very low inventory and that’s pretty consistent in hot real estate markets, just not a whole lot of houses. Get into bidding wars which you do get isn’t that great. Feel like you have to put a lot of work into it. Building is expensive. And it’s a tough situation.
The Australian Housing Bubble
We talked about housing bubbles way back in episode 81. This was in November 2015. Specifically focusing on the Australian housing market which was in a bubble for the year ending June 30, 2015, Australian home prices increased 10.5 percent. They were up 33% since 2012 in Sydney. They had some of the most expensive housing prices in the world and very high debt levels. The household debt to disposable income was 185% in June 2015. It was a housing bubble, yet it’s still going.
At the end of 2017, that household debt as a percent of disposable income is now 197% compared to 185% in June 2015. That compares to 106% in the U.S. So double. U.S. got as high as 132% in terms of their debt to disposable income back in 2007. Since I published that episode in November 2015, Australian home prices have continued to rise. The Australia Established Home Price Index has increased 15% since that episode. So it’s not going up 10% a year. It’s been almost three years, 15%. So it’s increasing about 5% a year. The average home price in Australia is 688,000 dollars, Australian dollars. It’s about $509,000 in U.S. dollars. The average home price in the U.S. for comparison is $375,000.
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