There are building signs of a global property bubble

It was only yesterday that I discussed and analysed the impact of the 60 billion Euros a month QE (Quantitative Easing) program of the European Central Bank. Later that day ECB President Mario Draghi gave himself and his colleagues a slap on the back by describing it thus.

In addition, there is clear evidence that the monetary policy measures we have put in place are effective.

Whilst confettigate occurred soon afterwards I do not think that the protestor who shouted “end the ECB Dicktatorship” was protesting this point,sadly. After all Mario was fulfilling one of the themes of this blog by shamefully attempting to take the credit for the economic boost to the area provided by the fall in the price. Perhaps with the Brent Crude Oil benchmark surging through the US $60 level he felt he had better be quick before it fades away!

However more quietly there was another impact on the day which was a further fall in bond yields as for example the ten-year yield of Germany has now fallen to 0.1% and in some ways even more extraordinarily the equivalent for France is 0.29%. Yesterday I pointed out that this was likely to be causing asset price inflation. So let us now also factor in the preceding efforts at QE from the Federal Reserve, Bank of Japan, Bank of England and Swiss National Bank (via investing its foreign currency reserves) and look at an impact of this.

Global Property

As bond yields fall in so many places investors looking for an income find it ever harder and they have to look elsewhere. This is symbolised in a way by the fact that the time it has taken me to write a paragraph the German ten-year yield has fallen to 0.09%! In such an environment bricks and mortar are something which investors can turn to as they appear physically at least to be an oasis of stability. But what happens if a tidal wave of cash heads in its direction? MSCI have pointed out some consequences. From the Financial Times.

Globally, property generated total average returns of 9.9 per cent in 2014 thanks to rapid capital value appreciation, MSCI found — the best performance since 2007 and the fifth consecutive year of increasing returns.

Okay so happy days for existing investors as well as hinting at how we got into our current malaise. You will not be surprised to read about the leaders of this particular pack.

UK real estate returned 17.9 per cent in 2014 while the US returned 11.5 per cent…..In London returns topped 20 per cent…… price rises in Dublin drove the total return in its real estate markets to hit a record 44.7 per cent — the best performer of all world cities in MSCI’s analysis.

Celtic Tiger mark two anyone?

But there is more.

MSCI found listed real estate companies had also significantly outperformed the world’s booming equity markets. Globally equities generated a 10.4 per cent return, but property stocks returned 19.5 per cent.

So the equity markets which of course are seeing their own QE boost with new high after new high being reported are being left behind by global property markets right now.

Yield and Rent

In essence this is the driving force as places which used to provide it such as sovereign bonds no longer do. So is it all about the rent? The catch is that whilst it is doing well when compared to a plummeting bond yield the outright position is much less cheery.

This is particularly the case in the US, where investors’ returns from rental income are now lower than before 2008, when a crash in massively overleveraged property triggered an international banking slump.

What could go wrong? Also the US is by no means alone.

Most global markets are at or close to historic low [yield] levels,

Of course faced with such a situation there is an inevitable response.

People are moving up the risk curve into riskier locations and taking on higher levels of debt and more challenging development activity.


To get a proper bubble we need for there to be substantial flows of money into that area from new and sadly usually credulous investors so what signs of that can we see?

the voracious spending — dubbed a “wall of capital” — has now spread out into riskier markets…….European QE was likely to boost real estate prices further, Mr Hobbs warned. “QE is sucking in real estate capital because debt finance is so cheap,” he said.

In the past year investment cash has poured into continental Europe — particularly the periphery — MSCI found.


Just under a year ago a sports shop on the Kings Road in Chelsea closed and it did so due to this. From the Evening Standard.

Michael Conitzer, who runs the shop, said he can no longer afford the rent, which was raised by 50 per cent at the review last year to more than £700,000.

My custom of the occasional T-Shirt and shorts purchase was clearly never going to finance that! But if we travel to a land down under to coin a phrase  we see the same thing according to the comments to the FT article.

In a suburb of Melbourne, in the high street and across the lane from a railway station, there is a shop that was brand-new 5 years ago and that has remained empty ever since. The asking rent was too high. Now, it has two adjoining shops that are also empty. (Alfred Nassim).

It got this reply from across the atlantic.

In a suburb of New York City, many of our favourite local restaurants have closed down over the last several years – the reason given by the owners was invariably:  “rent increases, can’t make ends meet”. (User_7995).

Not Everybody Agrees

The OECD compiles a price to rent database and concludes that whilst there are countries with severe imbalances (New Zealand heads the list) overall the situation is actually undervalued. Mind you it shows Ireland as undervalued as we wonder how  last years surge in prices in Dublin will impact the next set of data.

Also Jonathan Gray of Blackstone disagrees but then you could argue that he has a vested interest here.

Blackstone,the world’s largest private real estate investor,,,,,,Mr Gray just made a $26.5bn bet on the global property market.


There is much to consider here as we observe central bankers pumping up the volume in terms of providing liquidity and wonder where the hammer will fall? Of course consumer inflation measures are invariably neutered in this area as they mostly exclude asset prices. Thus asset price gains are presented as an increase in wealth and expected to increase economic output. For those who own property some of that is true as house price growth in the UK for example, has in the last couple of years has exceeded wider inflation and wages by quite a margin. But what about those who do not own property? Either they are left out or they face even higher prices and so they are not richer but are poorer. This leads to a generational issue as the asset rich are mostly older and the asset poor mostly younger. Accordingly my view is that this is more of an asset and wealth transfer than an increase in it.

But if we return to the QE reducing yields issue then we find ourselves mulling this from Germany. The numbers are for institutional property investment.

 The rental yield, including sunk costs, works out around 3%, with tax breaks if you hold for 12 years.

Or a bond yield fast heading to zero. Again what could go wrong?

Once this plays out and these matters invariably take longer than you think which market will central bankers pump up next? As to a musical accompaniment whilst you are thinking this through let us try Joe Walsh of the Eagles.

So I’m floating on a bubble while the world goes down the drain.
Slipping on the soap, running out of rope,
But all and all I can’t complain,
And that’s the rub according to the rules of the game.
The world’s going down the drain,
When the bubble bursts you might as well drink the cork and pop the champagne.
When the bubble bursts, the world goes down the drain.

19 thoughts on “There are building signs of a global property bubble

  1. Great blog, Shaun, as usual.
    Property bubbles, both in residential real estate and farm land, are very much an issue in Canada. Yesterday saw the release of the quarterly Monetary Policy Review, the Bank of Canada equivalent of the Bank of England’s Inflation Report:
    I tried to leave the following comment on the report, which the Ottawa Sun hasn’t posted:
    “In response to a question about the drop in the overnight rate aggravating the risk of excessive debt it was meant to address, Carolyn Wilkins, the Senior Deputy Governor of the Bank of Canada said that ‘There are some areas where it [housing demand] is still rather…rather robust, Toronto and Vancouver, but again we set monetary policy to achieve our inflation target and it’s certainly not our first line of defence against that kind of situation.’ Governor Poloz chimed in to say that ‘interest rates certainly aren’t the tool to try to manipulate that risk’.
    “The idea that inflation targeting is in no way compatible with keeping house prices and by extension, mortgage debt, under control is simply wrong. The CPI All-items gives a considerable weight to changes in new dwelling prices and some weight to changes in new housing prices. Large enough increases in housing prices should raise the inflation rate. In fact, they have helped to do so and this is part of the reason that the core CPI has been above the 2% target rate for the last seven months. Does the senior management at the Bank of Canada really have no clue how the inflation indicator that they are supposed to target is actually measured?”
    It seems that the manager of the Ottawa Sun website now sees it as part of their mission to protect the Bank of Canada from hostile comments. By the way, I had to copy the remarks of the press conference from repeatedly watching that segment of the video. There is no official transcript of the Bank of Canada’s MPR press conference as there is for the Bank of England’s Inflation Report press conference, although there certainly should be one.
    While the Canadian CPI includes housing prices, unlike its UK equivalent, it is completely dependent on new housing price index (NHPI) data, even for series like mortgage interest, real estate commissions and land transfer taxes (i.e. stamp duty) that are largely or almost exclusively related to existing housing. For the urban centres that Senior Deputy Governor Wilkins mentions the NHPI has been showing much lower inflation than the Teranet National Bank HPI, based largely on resale price data. The annual NHPI rate for house only for February (which drives the March CPI inflation rate) is 3.5% for Hamilton, 3.2% for Toronto and -0.8% for Vancouver. The corresponding Teranet HPI estimates for March are 8.4% for Hamilton, 7.6% for Toronto and 5.3% for Vancouver. The differences are stark. Obviously, Senior Deputy Governor Wilkins takes the Teranet estimates rather than the NHPI estimates as realistic, as the latter doesn’t show a housing boom for Vancouver; it looks more like a bust. That being the case, why does the Bank of Canada stand behind a measure that shows much lower house price inflation in the current period in urban centres that it has identified as having hot housing markets? It seems the senior management really has no detailed knowledge of how homeownership costs are measured in the Canadian CPI and are quite unfazed by its defects.

    • Andrew,as ever,you and Shaun have really opened my eyes in terms of how inflation data is actually unrepresentative of the cost of living-I was aware before,but you guys really cross the ‘t’s’ and dot the ‘i’s’.
      Thanks as ever for your insightul replies.

      • Thank you for the kind words, Dutch. Actually, the way Canada measures the cost of living in the Canadian CPI is probably more like how the UK measures the cost of living in the RPI and now the RPIJ than any other country. However, the UK seems to be a lot more serious about resolving the remaining problems in their index than we are in ours. Unfortunately there is no Canadian Shaun Richards, and we really could use one.

        • Hi Andrew and thank you

          I am not surprised that the central bankers are picking the lower inflation measure, Plus ca change and all that! But why are new house prices in urban centres in Canada seeing quite markedly different house price behaviour to existing ones?

          Meanwhile in other news I am picking my way through the new suggestions for a new inflation index for the UK at the Royal Statistical Society and welcome much of what I have read so far.

        • Shaun and Dutch, I should mention that my comment did finally appear on the Ottawa Sun website. I complained about it not being posted, but I don’t think that had anything to do with it. It seems that if something in a comment puts it in the Ottawa Sun’s moderation queue, it can be a slow process getting it approved.
          As to why the Teranet and NHPI series are showing such different movements, the NHPI does not include condo apartments whose prices tend to be more volatile than prices of single-detached and single-attached homes; I THINK that they are in the Teranet indexes and they are definitely in the MLS resale price indices. The NHPI data relates to tract homes usually built on suburban tracts; in many cases the Toronto index will include no homes actually built in the city of Toronto at all. The Teranet index would include homes closer to the downtown core where the rise in lot costs would be more important. Finally, because it is based on matched-model pricing, the NHPI is vulnerable to underestimating price increases when builders sneak in a price increase by introducing a new model in a rising market or overestimating price increases when builders sneak in a price decrease in a declining market. It seems that this is a particular problem in larger markets like Toronto and Vancouver. The obvious solution would seem to be for the NHPI to move to hedonic pricing at least for the larger cities. At one time, the NHPI actually did switch to hedonic pricing for some of the larger cities, but they encountered some problems and pulled back, and that is where it stands now.
          I also have been impressed with the new draft from John Astin and Jill Leyland on their household inflation index. I was especially pleased to see that they now specifically state that stamp duty should be a component of their proposed index.

  2. no transcripts

    seems to be a trend , even on Minitru

    a trend that will lead to the shaggy moments on all things

    “it wasnt me !”

    I am quiet perturbed by this recent trend , Shaun . perhaps you’ll not do the same

    If you dont have transcripts and you pull one of these wonks up on something they said

    “sorry , you misheard ” or ” out of context ” or ” I meant..” ” I dont recall saying that ”

    things are looking bad again …….must be a war because truth again has been a casuality …

    Keep up the good work Shaun !


    • Hi Forbin

      As the first casualty of war is the truth then it seems we are indeed in a war! Or as George Orwell put it.

      “He who controls the past controls the future. He who controls the present controls the past.”

      Actually that sounds like something the God Emperor of Dune might have said.

      Meanwhile Brent Crude Oil is above US $63 now…

  3. Shaun,

    Thanks for that.I’ve been busy with the election and thus not able to keep up with your posts over the last month or so.

    As I mentioned to Andrew,you both-and many of the other commenters too-do a grand job of trying to get this information into the public domain where it desperately needs to be.

    I sometimes feel like I’m a broken record coming on here and whining about how scandalous it is that those who have such a massive influence on our futures seem to have such a poor grip on reality.

    All the best in fighting the machine.

  4. Hi Shaun
    A compliment from me is long overdue thankyou for
    educating us mere mortals on a daily basis.
    I liken the system presently in control to der
    management who for those of you not old enough to
    remember were the immaculately groomed dinner suited
    sinister characters played by Hale and Pace.It seems to me
    “Der Management” particularly the likes of Blackstones Gray
    have convinced themselves that dodgy finance will prevail
    indefinitely but as you say “What could go wrong”
    Is it possible that to keep TBTF going on that
    the next industries to be bailed out might be pensions
    and insurance? If “Der Managements” long term paln
    is to continue to bleed the masses then how far into the
    future will it be before they rebel? Nobody want this to
    happen but it seems that at some point it is likely,


    • Hi JRH and thank you

      We could do with something like the Glorious Revolution and perhaps this time it would hopefully be bloodless. As to “Der Management” there need to be rules and punishment for gross failure but they only ever get rewards.

  5. Since banks have huge loan business secured by property, the value of the collateral they hold is being pumped higher and higher…we’ve seen all this before.
    From sub-prime mortgage lending dressed up as AAA’s to sub-prime collateral being overvalued.
    There is one almighty POP! coming.

  6. Hi Shaun, You are right, everybody needs a lttle bit of feelgood property valuation boom. We might even see it the nether regions of southern Europe after a year of ECB QE. There is no clearer demonstration of how property manipulation can be a force for economic good. I work in the housing association sector and David Cameron has promised our assets to the tenants, what a sound bite, folk at the bottom can have a slice of the action amd we can avoid talking about or building any more so the rises are “baked in”.

    What none of our Politicians are talking about the rise in property taxation after the election but it is a natural circle of wealth, indeed this could be the ideal formula to rescue blighty. We can forget people going out work, we just need to print more, push up asset values, then lightly tax the increase and value and hey presto its sustainable. Rateable values have been frozen since 1983 I think so , now given the buoyant economy theres no reason not to make the proles pay a little more.

    The way I see it is, as has been regularly discussed, mansion tax is no good, a small number of large fees but a larger number of escapees and non-doms so what is needed is a small amount from a lot of people. Yes those properties worth more than £100k but less than £500k all need a 25% rate rise.

    The most important folk will be unaffected -mansion owners, also the rentiers can pass on the increase to tenants and certain segments can be excluded, commercial property is mainly owned by banks and still empty so they can be excluded.

    So my comment is half in jest but I genuinely whatever the govt after May 7th. Theyll do it.


  7. Hi Shaun:
    Thus asset price gains are presented as an increase in wealth and expected to increase economic output. “For those who own property some of that is true as house price growth in the UK for example, has in the last couple of years has exceeded wider inflation and wages by quite a margin.” I’m one of those “asset rich” but how am I better off? If I try to buy bigger house I find ithas gone up by a commensurate percentage and so is even further out of my reach. If I try to buy a new car or capital equipment for my business and want to realise some of the gain out of my house to finance the car I have to borrow against the extra equity in the house, thereby paying more out of my income in loan interest so how has my wealth increased?

    My song for today’s blog is Credit in the Straight World by The Young Marble Giants:

    Go for credit in the straight world
    Look a dealer in the eye
    Go for credit in the real world
    Won’t you try?

    I got some credit in the straight world
    I lost a leg, I lost an eye
    Go for credit in the real world
    You won’t die

    Instant credit in the straight world
    Leaving money when you die
    Lots of credit in the real world
    Gets you high

    • Hi Noo2

      There are actual gains from sales related to downsizing and there are paper gains for nearly all property owners which the establishment hope will be spent at least in part. However you do have a point which I shall respond to with some other verses from the rather aptly named Imagination.

      Never let your feelings get you down
      Open up your eyes and look around
      It’s just an illusion, illusion, illusion

      Could it be that it’s just an illusion
      Putting me back in all this confusion?
      Could it be that it’s just an illusion now?
      Could it be that it’s just an illusion
      Putting me back in all this confusion?
      Could it be that it’s just an illusion now?

      Could it be a picture in my mind?
      Never sure exactly what I’ll find
      Only in my dreams I turn you on
      Here for just a moment then you’re gone
      It’s just an illusion, illusion, illusion

      • Sorry Shaun I disagree. The “gains” to which you refer consist of “downsizing” as you say, i.e. you live in a smaller or cheaper house. Fine if your family’s shrunk, not so good if they haven’t or may have even increased resulting in a fall in your quality of life whilst the money you have realised from the downsize may go some way to compensating for your living standard fall but even if it manages to totally compensate for your downsize and associated fall in living standard, you are only back to where you started so, given that my definition of “wealth” is your quality of life or standard of living again, I ask how has my/your wealth increased??

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