The most recent Absa House Price Index indicates that nominal house prices have now been contracting for three months year on year. The latest figure shows a decline of five percent since April 2011. As a result, house prices are in real terms moving closer to their long-run trendline, aided by high building-cost inflation (which is now much higher than consumer inflation).
Lucky South Africa, your bubble is deflating; not bursting!
South Africa’s market could have been in a much worse state…
In the USA, Robert J. Shiller, renowned for what he and Greenspan had coined "irrational exuberance", quite rationally predicted in 2006 that the bubble would burst (The Economist, 22 April 2006). And so it did.
Shiller now believes that it would take at least a generation, and maybe even two, to recover (Reuters, 24 April 2012). Granted, this latest opinion seems a bit extreme, but it should not be rejected out of hand because it is probably based on the Japanese experience after 1989. In that year an extraordinary real estate bubble in Japan burst and more than two decades later there is still no recovery in sight — in spite of huge monetary expansion ("quantitative easing") and zero or near-zero interest rates. In fact, the Japanese can be called the inventors of quantitative easing. So, perish the thought, Shiller could be right again.
In well-behaved, stable Netherlands, with inflation at a modest 2.3 percent today, house prices have declined by a noteworthy 12 percent since the outbreak of the credit crisis in 2008 (ABN AMRO, 29 February 2012). In fact, in March of this year house prices were five percent lower than a year earlier and in April the number of sales (churn) had declined by 19 percent year on year. It seems the end is not in sight.
Like the examples above, deflating house prices are now a feature of most developed countries, including all Anglo-Saxon ones. What these nations seem to have in common is hangover economies after the intoxicating cheap-credit consumer boom of the previous decade. Let us, completely unscientifically, check this theory by considering the two major contrarian economies, Germany and China.
Germany’s economy has so far given the European crisis a narrow miss. In terms of our theory, a lukewarm economy would lead to a tepid house market. Thus, rather unsurprisingly, in the first quarter of 2012, German house prices grew, in tandem with the weak economy, at a modest rate of 2.6 percent — a trend evident since 2010 (Verband Deutscher Pfandbriefbanken or vdp). In comparison, the inflation rate in Germany is 2.1 percent, meaning there is not much real growth.
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