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Wednesday, April 20, 2011

Popping Timing

Many people ask me recently when prices will fall; when it will hit banks; when unemployment will go up ...

It is impossible to predict timing of a such event. To help us understand timescale of the process I created a charts that show timings of the bubble bursts in Ireland and USA.

USA and Ireland Bubble Deflation Timing
On the chart you may see that house prices started deflating very early (July 2006 in USA and July 2006 for Ireland and few months later in Dublin). At the beginning price correction was very slow. It took almost a year and a half in USA and even longer in Ireland to drop 10% from the peak. It took two years for majority of people to realize that something is very wrong. Even the most involved people like FED chairman Ben Bernanke*, two years after process started were not aware (or willing to admit) that country is facing serious problem caused bu housing bubble burst).

It is even more interesting to see changes in major economic parameters during this period. Prices started falling while unemployment was very low. Even after correction started unemployment continued to be very low and even dropped in USA. It took more than a year after prices started to fall for unemployment to start rising and more than 3 years to reach maximum. GDP growth was very healthy at the moment prices started to fall and remained healthy for a year or more after that.

It is also interesting to see that house prices started falling while interest rates were going up. Than prices continued to fall while rates were stable but fall accelerated with interest rate cuts. Credit was available and  inflation was at normal level for the period; business and/or consumer confidence was very high. Maybe the most revealing part is saving rate. Prices started falling at the peak of the saving as a percentage of GDP. 

Consequences of both bursts were severe: deep recession, high unemployment, deflation, credit squeeze, zero interest rates, drop in saving rates and confidence.

If someone was presented with the charts up to the point of house price burst, he/she would likely say that future is bright because all economic parameters were good. In reality things were much different, high level of debt and long period of misallocation of investments into housing caused one of the most severe recessions in history. Low unemployment, high saving rates, high confidence, GDP growth and high interest rates that in theory should enable central bank to react were not enough to prevent the worst.

What will be timeline of the Australian housing bubble burst is impossible to say. If we can learn anything from this data, that should be caution. At the beginning it always looks harmless - ordinary cycle price correction; nothing more than that. It quickly develops in galloping destruction of the economy and no action form central bank or government is able to stop it. 

* Ben Bernanke (June 10, 2008) “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.” 

- S&P/Case-Shiller Home Price Indices
- Economic and Social Research Institute (ESRI), Dublin, Ireland


  1. Great work again raveswei. I am in the process of pulling together similar data for all of the bubble/bust nations.

  2. Hi raveswei.

    I don't think all places in pop in sync with one another. It depends on the nature of the town/city/region in question.

    There is a nice little seaside town not far from where I live on the central Queensland coast. We have been visiting regularly for generations. Big enough to have all mod-cons yet smaller than Byron Bay. Great fishing, surrounded by national parks in all directions - quite idyllic. However, it has suffered from the ravages of investors driving prices to ridiculous levels over the past decade. Three and four acre blocks with houses sprouted like mushrooms, not mostly for the lifestyle but for the investment value. I think a lot of people thought they would be flogging these investments today for $1 million plus.

    A relative in the local property conveyancing business told me yesterday that prices in this town have more or less collapsed. A quick search shows plenty of properties under $300 000 (still too expensive) and a great deal of properties marked "price by negotiation" and even "developer liquidating".

    All I'm after is a humble little holiday house or cabin, nothing flash (it can be a fibro bungalow for all I care) and I don't give a shit about the investment value. Just a nice little place for family and friends to spend time together.

    In a place where about the only employment is a handfull of lower paid retail and hospitality jobs, they have overbuilt and greedy investors have overcommitted - and now it's time for them to pay the piper.

    I'm patient.

  3. Three years after the GFC began and still no bursting of the 'bubble'. Open-ended predictions have no utility and in purely economic terms are useless. One might as well proclaim "South Sydney are going to win the premiership!". A reasonable punter might ask "Well, when? Should I make a bet at Sports-bet now? Of course the answer will be "No not THIS year, I have no idea when this will happen, but it WILL happen' and perhaps one day you'll be proven correct. Not much you can do with that...

  4. Hi Glenn,
    As I said, it is impossible to predict timing of a bubble burst. The goal of this post was not to "predict" but to show under what economic conditions (unemployment, IR, GDP growth ...) USA and Irish bubble bursted. You seem to think that GFC bursted those bubbles (or should burst ours) but it is more that clear that the opposite happened.

  5. Hi Lefty,
    Of course that all places are not in sync. That's why I used house price charts with a few different local markets.
    I think the best home buying advice somebody can give today is "wait to see". It seems that there is little to lose and a lot to gain with a little patience.

  6. Hi Glenn Peters,
    The "bubble" is bursting as we speak. Maybe you can't see it because you're inside it?

  7. Glenn, another key problem with predicting this is the actions of the government. Steven Keen saw the bubble bursting in ~2007-2008 but got egg on his face, because days after his announcement the gov invented the first home vendors boost, gave everyone $900 and guaranteed (bailed out) all the banks.

    You can call it, but if they freak out and do something (completely retarded) and bail everyone out and inflate it further on government debt everyone would tell you you're wrong and an idiot.

  8. the longer and higher something booms, the sharper and lower it busts. i truly fear for what is in store for aus, all the data point to a drastically overheating economy with gov complicity and no one in the MSM is saying anything about it. the evidence is all there staring people in the face...AUD at record highs, M3 money supply going exponential, FHOG, gov purchases of RMBS to pump more cash into the banking system, over reliance on overseas capital and a single export market...stuff like this will not end well....

  9. raveswei, you are a wanker, im sure once you get on the "property ladder" you will most certainly create a url named Maybe your productivity would be best spent on a home business or your career...

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