![]() ![]() Relative price city-to-country indicator.The study analyses house prices in 25 cities using five key sub-indices: Published annually by UBS, a Swiss bank and financial services company, the Global Real Estate Bubble Index determines which cities around the world have the greatest housing bubble risk by investigating international real estate trends and prices. We suspect that with the continued increase in home prices this year and the big surge in mortgage rates to nearly 5%, the affordability reading for the first quarter of 2022 is going to be much lower (even though household incomes have continued to grow).The most recent edition of the Global Real Estate Bubble Index has once again highlighted the excessively high prices on the housing market in the Dutch capital, warning that the current housing bubble in Amsterdam shows a real risk of bursting. And a lot has happened since the end of last year. You can see in the chart below that housing affordability had already dropped quite significantly from the highs in 2012-2013 to the most recent reading for the fourth quarter of 2021. All three of those inputs have been rising, but increases in the two that decrease affordability (housing prices and mortgage rates) are more than offsetting growth in the one that increases affordability (household incomes). Housing affordability is determined by three things: household incomes, the cost and availability of financing (mortgage rates), and housing prices. This heavy dependence on ultra-low mortgage rates creates a problem now that mortgage rates are rising. Given that these sources of demand are highly unlikely to abruptly reverse, it seems that demand is likely to remain elevated well into the future.Īll that said, today's bull market in housing would not have been possible without the artificial suppression of interest rates by the Federal Reserve. Some Millennials had deferred homeownership until now due to inadequate incomes or savings, but now that the job market has improved dramatically many are deciding to take the plunge.Ī second factor is the trend toward "work from home", or "WFH", which many believe will be a lasting legacy of the COVID pandemic. The first and most obvious factor is that a large demographic segment, the Millennials, are reaching the age when folks typically buy homes. The growth in demand for housing, which has accelerated materially in just the past few years, is related to several factors as well. The chart below shows that at the current sales pace, there is only two months of supply available for sale. These headwinds to more rapid construction have only intensified, and so supply is likely to be constrained well into the future (which could support elevated housing prices). Some of the factors inhibiting building activity include a severe shortage of labor supply-chain disruptions associated with trade wars and Covid rapid inflation in raw materials and land shortages driven by zoning restrictions and land-use regulations. But the construction deficiencies have endured up through present day. It's understandable that homebuilders would be skittish in the years immediately following the collapse of the housing market. On the supply side, it has become fairly obvious that new home construction has been far too low since the GFC. Rather than speculation and easy credit, there has simply been a large mismatch between the supply of and demand for housing, and the mismatch is especially pronounced for lower-priced, entry-level homes. The strength we are seeing in today's housing market has a much more straightforward explanation. ![]() Shady lending practices, to include very small or even no down payments, adjustable-rate mortgages, mortgages without proper documentation, teaser rates, pay-option ARMs and inflated sales appraisals, are not contributing in any meaningful way to the strength in housing prices we are now seeing.Īnd more critically, there is only a very limited market for bonds backed by sub-prime or Alt-A mortgages, keeping origination activity for unqualified borrowers limited as well. Personal Loans for 670 Credit Score or Lower Personal Loans for 580 Credit Score or Lower Best Debt Consolidation Loans for Bad Credit ![]()
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