Housing: A Bear Market Everywhere

07/22/2008 12:00 am EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carlton Delfeld, editor of Chartwell Advisor ETF Report, says the housing market may be bad in the US, but it's even worse in other parts of the world.

Construction starts on single-family homes in America fell 1.7% in April from March, to a rate of 692,000, its lowest level in 17 years. In many urban areas, home prices have fallen 15% or more and may fall another 10% to 15% during the next year.

It may not make you feel any better, but overseas real estate markets built bubbles of much higher proportion, according to a study by the International Monetary Fund (IMF). The IMF looked at 17 global markets and built a model which determined how much of the run-up in real estate prices was due to fundamental factors such as higher real incomes and interest rates and how much was pure speculation. Of course this looks back to 2007 so markets have already adjusted somewhat but the study does help us put things in perspective.

The most overvalued home markets in order were Ireland (+32%), Netherlands (+29%), Britain (+28%), and Australia (+24%). Interestingly, there were markets undervalued based on fundamentals: Austria (-6%), Canada (-3%), and Germany was just about right at (+2%). The US home market overvaluation ranking was actually towards the bottom of the chart at +11%.

This is consistent with the inflation-adjusted run-up in prices from 2000 through 2007. In America, prices rose 42% while in Spain it was 95% and it was 90% in the UK. Mortgage debt relative to GDP is high in the US at 75%, but even higher in Australia at 82%, [the] Netherlands at 98%, and Denmark at 102%.

Housing prices in the United Kingdom fell 2.5% in March, and together with the pullback in the financial sector and speculation that interest rates and the pound sterling is headed down has brought the market to just 11x earnings.

Earlier this year, this is what happened to Ireland, which topped the IMF's housing overvaluation rankings. Ireland has already experienced a collapse in housing values, and this has brought GDP growth expectations down below 3% for the first time in 25 years. But Ireland will recover nicely over time given its talented, well-educated workers, openness to foreign investment, and low 12.5% corporate tax rate.

The overvaluation in real estate prices is not American-grown but global in nature. Build a global portfolio to take advantage of the pendulum inevitably swinging the other way.

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