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Emma Linnane in her apartment in Dublin. Its value has declined by $100,000.
The collapse of the housing bubble in the United States is mutating into a global phenomenon, with real estate prices swooning from the Irish countryside and the Spanish coast to Baltic seaports and even parts of northern India.
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This synchronized global slowdown, which has become increasingly stark in recent months, is hobbling economic growth worldwide, affecting not just homes but jobs as well.
In Ireland, Spain, Britain and elsewhere, housing markets that soared over the last decade are falling back to earth. Property analysts predict that some countries, like this one, will face an even more wrenching adjustment than that of the United States, including the possibility that the downturn could become a wholesale collapse.
To some extent, the world’s problems are a result of American contagion. As home financing and credit tightens in response to the crisis that began in the subprime mortgage market, analysts worry that other countries could suffer the mortgage defaults and foreclosures that have afflicted California, Florida and other states.
Citing the reverberations of the American housing bust and credit squeeze, the International Monetary Fund last Wednesday cut its forecast for global economic growth this year and warned that the malaise could extend into 2009.
“The problems in the U.S. are being transmitted to Europe,” said Michael Ball, professor of urban and property economics at the University of Reading in Britain, who studies housing prices. “What’s happening now is an awful lot more grief than we expected.”
For countries like Ireland, where prices were even more inflated than in the United States, it has been a painful education, as homeowners learn the American vocabulary of misery.
“We know we’re already in negative equity,” said Emma Linnane, a 31-year-old university administrator.
She bought a cozy, one-bedroom apartment in the Dublin suburbs with her fiancé, Paul Colgan, in May 2006, at the peak of the market. They paid $575,000 — at least $100,000 more than it would fetch today. “I sometimes get shivers thinking about it,” Ms. Linnane said, “but I’ll let the reality hit me when I go to sell it.”
That reality is spreading. Once-sizzling housing markets in Eastern Europe and the Baltic states are cooling rapidly, as nervous Western Europeans stop buying investment properties in Warsaw, Tallinn, Estonia and other real estate Klondikes.
Further east, in India and southern China, prices are no longer surging. With stock markets down sharply after reaching heady levels, people do not have as much cash to buy property. Sales of apartments in Hong Kong, a normally hyperactive market, have slowed recently, with prices for mass-market flats starting to drop.
In New Delhi and other parts of northern India, prices have fallen 20 percent over the last year. Sanjay Dutt, an executive director in the Mumbai office of Cushman & Wakefield, the real estate firm, describes it as an erosion of confidence.
Much of the retrenchment seems to be following the basic law of gravity: what goes up must come down. With low interest rates helping to inflate housing bubbles in many countries, economists said the confluence of falling prices was predictable, if unsettling.
This is not the first housing downturn to cross borders, but its reverberations have been amplified by the integration of financial markets. When faulty American mortgages end up on the books of European banks, the problems of the United States aggravate the world’s problems.
Consider Britain, which had one of Europe’s most robust housing markets, with less of an oversupply than in Ireland or Spain. Then last summer came the subprime crisis across the Atlantic.
Within two months, mortgage approvals dropped 31 percent, compared with the previous year. And by March, average housing prices had fallen 2.5 percent, the largest monthly decline since 1992.
“The boom in house prices was actually much bigger here than in the U.S.,” said Kelvin Davidson, an economist at Capital Economics in London. “If anything, people should be more worried than in the U.S.”
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The bubble to end all bubbles?
Posted on: April 4, 2008
- In: All | bubble | bubbles | charities | end | Investment | pension funds | portfolios | universities
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Are we in a bubble? Far too late to be asking that question, says Chris Nolan, a former Valley newspaper gossip who now runs a startup, Spot-On. She weighs in on the current market crisis and its effects on the tech business. Her thesis: New regulations will on investment banks will bring an end to the tech-stock bubbles on which Valley VCs have feasted. (I asked if this meant she was back in the tech-gossip game; Nolan’s column served as one of this website’s inspirations. “I’m writing about business and politics,” she demurred.) Nolan compares sketchy mortgages approved by banks to the wafer-thin startups taken public by stockbrokers a decade ago. A brief version of her 887-word argument, followed by my take on where Nolan goes wrong:
Investment portfolios of universities, pension funds and charities expanded in value as Americans put their savings into stocks. As a result, stock prices rose. Richer, these institutions put money into venture capital funds. The funds spent like drunken sailors. As long as the stock market stayed up, they could reap the rewards of their investments. Venture capitalists, like mortgage companies, relied on investment bankers to lay off some risk by selling their wares to someone else — in this case, IPO stock to the public.
If all this reminds you of the U.S. mortgage crisis, a time where anyone could get a loan because it was assumed that the price of real estate would go up, up, up, you are not alone. During the stock bubble, the SEC made no bones about its inability to keep up with the number of filings it had to process, review and approve. Something similar happened at the mortgage banks. As long as everyone signed a piece of paper saying they knew risk was involved, the loans got written. Can you imagine a Netscape public offering — the company’s main product was given away — sponsored by a financial institution supervised by the Federal Deposit Insurance Corp.? Me neither.
A brilliant comparison. But Nolan puts too much stock in the powers of regulators. “Money goes where it is wanted, and stays where it is well treated,” former Citibank CEO Walter Wriston once told Wired. Already, U.S. regulations have driven some public stock offerings to new markets like London’s AIM. No regulatory scheme is airtight; indeed, the U.S.’s regime, relying too heavily on rules rather than principles, makes it all too easy to find loopholes. New regulations, while hard to argue against, will simply generate new ways of avoiding them. And psychology tells us people will always fall prey to bubbles. Will VCs will be among the profiteers? Perhaps not. And few among the Valley’s entrepreneurs will shed a tear for them. They’ll be too busy finding something new to inflate, with someone else’s money.
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