Global Real Estate Bubble Begins To Pop Like Dominoes

One by one real estate markets across the globe have begun to pop as the record real estate bubble has turned to a slow down in prices and growth. Multiple regions and real estate markets have begun to cool despite record low interest rates and Quantitative Easing (QE) stimulus.

Until recently the global real estate markets had been one of the best performing asset classes over the last 7 years, as Central Banks coordinated efforts to stimulate the economy in 2009 and further in 2012 - 2016 brought interest rates around the globe to record lows. Some countries even went negative with the objective to ensure GDP growth continues.

The Tipping Point Of Stimulus - Too Much Of A Good Thing

Eventually though any market will reach the limits of what artificial stimulus can do to prices and demand. Whether its auto / car market, think of the cash for clunkers stimulus and the more recent auto subprime loans bubble in the US, or  whats happening right now with real estate prices in different countries. Eventually demand begins to wane even when stimulus remains or increases. This happens when too much of a good things begins to take hold and stimulus actually becomes a negative to demand.

Pizza Eating Example:

If your hungry and you love pizza you decide go to a pizza restaurant. The demand for eating pizza is high, however eventually the demand or desire for more pizza will start to fall until you reach the point of when you don't want no more pizza. Your desire or demand will not change even if the pizza price falls by 50% making it easier to buy more. Why because you reach the limits of your own consumption and demand eventually disappears.

This simplified example works in a similar way to economic stimulus in asset markets as it does for the rise and fall in demand for pizza. Everything has a limit where extra stimulus stops being effective.

Luxury Manhattan Real Estate - Latest Market To Correct

The luxury real estate market in Manhattan is one of the latest markets to cool as it pop its real estate bubble. In the chart below you can see the declining trend in growth in prices in Manhattan. Since January 2015 where growth was around 8% pa, the level of growth has continued to fall each month to February 2016. Where the data shows that it has gone negative to close to a 1% fall in prices.

Click chart for source: bloomberg.com

San Francisco area has been another hot real estate market that has started to cool down, despite being a trendy place to live and close to employment opportunities. With several big Technology companies headquarters located in the area.

In this short video below its give you a good understanding how the bullishness of the real estate market has tapered off, as the real estate sales and prices have soften and the time taken to sell has increased compared to a year ago.

One of the reasons why the San Francisco real estate market has started to cool despite low interest rates and stimulus is due to the fact the employment levels in the area has peaked, and has been stagnating since September last year with no growth recorded in employment in the area. This has effected rental demand and rental prices have begin to come down also weighing on the San Francisco real estate market.

Based on the indicators and the employment data the trend for this real estate market is not looking good going forward.

Click chart for source: zerohedge.com

Across over to Vancouver real estate market in Canada, has experienced a spectacular fall in prices in a very short period of time. (See chart below)

Similar to San Francisco real estate market, Vancouver had experienced sharp rises in prices over the last few years as foreign buyers and local demand drove up prices. This was due to record low interest rates forcing investors to find a destination to earn a return on their capital, as cash and bonds income continued to fall. However recent tax increases for foreign buyers in Canada has effected demand dramatically in the area, with prices falling sharply since July this year.

Click chart for source: zerohedge.com

The video below gives you a snapshot of the current Vancouver real estate market and the fallout from a sharp drop in home sales in the region. On a bright note they expect the market to remain relatively stable moving forward. Given the global backdrop in real estate trends this assumption may change.

In the UK commercial real estate has been experiencing a slowdown since the beginning of the year and was in the process of cooling before the Brexit vote dampened confidence for this asset class further causing further pain for the sector.

The graph below shows the trend in property deals value falling compared to the same month year ago. The trend is clearly falling faster as February through to May show steeper falls than January.

Click chart for source: bloomberg.com

The falls in property deal values is most likely the consequence of income and capital growth returns continuing to fall each month since reaching the peak in October 2014 of 12.95% return, to the current return of 5.91% in March 2016. (See chart below)

Click chart for source: bloomberg.com

Australia's real estate bubble has continued to remain red hot in bubble territory despite warnings from BIS and other groups on debt levels. To see the article click here Australia's debt addiction fuels bubble.

Despite the residential real estate market continuing to perform strongly in Australia, the Australian real estate investment trust (REIT) sector which predominately focuses on commercial real estate, has experienced sharp falls in prices since August. The REIT sector current price has fallen back to the levels set in April this year despite setting a yearly high back in July this year.

Why It Feels Like Everything Is OK

This chart below shows exactly why it appear that everything seems to be OK even though each month another real estate market across the globe starts to cool as their bubble pops and deflates.

The chart below shows global GDP expectations for 2016 overlapping the global stock market and global central bank balance sheet levels.

The chart shows the blue line which represents global central bank balance sheet continuing to increase, and the global stock market following this trend up with it since the start of this year.

What this indicates is that the global stock market is being held up by artificial stimulus as the stock market no longer reflects global GDP movements to the downside.

Click chart for source: zerohedge.com

I'm aware that not every real estate market around the globe has started to pop. In fact some markets like China and Australia residential market are continuing to go higher.

The signs however are getting stronger as more and more real estate bubbles popping are emerging each month. Eventually more real estate markets will be effected, as the stimulus effect on demand starts to fade. Coupled with the fact global GDP continues to fall and the effect it will have on employment levels will cause real estate markets to fall in more regions.

Sources:

bloomberg.com - 1
bloomberg.com - 2
zerohedge.com - 1
zerohedge.com - 2
zerohedge.com - 3
theaustralian.com.au