The price of land was soaring. The cost of cotton and slaves rose sharply. Speculative lending standards and a land bubble of the edge of bursting forced interest rates to rise around the world, and crisis followed the economic expansion of 1834 and 1836. After a brief recovery from 1838 to 1839, it wasn't until 1843 following a gold rush, that the economy was booming again by 1850.
You see, booms follow busts, followed by booms followed by busts. Although, the magnitude of these have been tamed by central bank intervention especially since the GFC.
As Australia emerges from the depths of government imposed lockdowns, we all know consumers are itching to spend. Spend on goods, services, and you guessed it, housing. Housing prices around the world have climbed to new heights. The lack of affordability has not been a hurdle to prices climbing. Record low interest rates, and an affinity with housing have made price, well, somewhat less of a concern.
UBS recently released their UBS Global Real Estate Bubble Index, which you can download here. I've taken the chart below from the report as I think it provides us with an excellent birds-eye view.
Here's UBS on Sydney:
After a short-lived but sharp price correction between 2018 and 2019, the housing market rebounded. From mid-2020 to mid-2021 prices increased by almost 14% in inflation-adjusted terms—the third-strongest rise among all analyzed cities. Overall, the market has recovered from all losses, and prices have reached the highest level on record. Price growth has clearly outpaced local incomes, stretching affordability and thereby increasing dependence on easy financing conditions even further. The growth of outstanding mortgages is accelerating again, as households are taking advantage of historically low interest rates. Monetary policy is likely to stay accommodative for the time being. A tightening of lending rules would likely result in a setback for prices.
The price growth that we have seen recently, especially since COVID, are not sustainable. Whatever it is that is driving price growth, although it may persist in the short-run, over long periods of time, the market public markets have proven over centuries that it has an knack for correcting itself. Centuries of data proves this point. I wrote about the long-term price growth of property here, and here.
Trying to identify a bubble is a fool's errand. It's risky business. Yet we've all become experts over the years. C'mon, you know a bubble when you see it, right? Right. Until that bubble bursts, you really don't have any proof now do you? And by then it's too late.
If you've followed UBS' report for as long as I have, you'll know these major cities have featured in most if not all of their reports. Yet here we are. Whether its private business, stocks or property, the short-term is noisy. Stay focussed.
I spoke more about private businesses and alternative assets with Koby Jones of The SILC Group on Masters in Investing podcast last week.