Real Estate News & Commentary

Learning from Bubbles: A Look at Housing Bubbles Worldwide

26 Articles Written

By now, the word "bubble" no longer conjures up images of childhood fun for most adults. Most of us now associate the term with the real estate market based on what has happened over the past few years. To make sure we learn from history, this article compares the bubbles of the last decade across a few English speaking countries and picks out a couple lessons.

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The Bigger They Are, The Harder They Fall

Whether we are talking about people, trees, or real estate markets, this same idiom holds true. Since the recessionary period in the 1990s, the economies of most developed nations have been growing at a rapid pace and their real estate values have followed. Home values in some countries have grown more quickly than others, and due to this rapid growth, many of them also experienced rapid declines following the credit crunch.

Prices in Perspective

To provide some perspective on the “bubbles” which supposedly formed in global real estate markets over the past decade, here is a housing price index from The Economist showing home prices in Australia, Britain, Canada and the United States over the past 10 years.

During the past decade, global economies recovered from the dot-com crash and real estate values went on a tear in most of the developed world. What we can see from this graph is that the countries who showed the greatest growth were later hit by the greatest declines. Australia and Britain had a great run over the first 7 years of the new millennium, but were stopped in their tracks as the global financial crisis unfolded. Things started to unravel a little quicker for the United States where the mortgage defaults started to occur first. In Canada, price growth was much more modest, but the decline in house prices that followed was the smallest of the bunch.

Another interesting observation that may not be apparent from media headlines is that even in real (inflation adjusted) terms, house prices in each of these countries are still ahead of where they were at the beginning of the last decade.

Learn from History

It's easy to get caught up in the hype, especially when things are going well. With double digit growth rates, who wouldn't be excited to get into the market? When things start to heat up, here are a couple lessons we can take away from our recent recession.

1. Look for Sustainability

The important thing is to ensure you are investing in properties which offer sustainable growth potential for the future. Take a look at the national and regional economies to determine whether they are poised to grow. Beyond that, drill down to the individual property and look at whether your monthly cash flow should be expected to grow or shrink based on economic trends.

2. Be Prepared for Price Dips

Now that we know that prices don’t always go up from recent experience, we need to make sure we can hang onto our properties through any price corrections so we are not forced to sell. As long as we have enough cash flow to ride out price fluctuations, we won’t be forced to take a loss while the real estate market hits a temporary bottom.

Creative Commons License photo credit: anieto2k

    Replied over 9 years ago
    Bad markets make for rich men
    Andrew C. MacDonald
    Replied over 9 years ago
    “Be fearful when others are greedy and greedy when others are fearful” – Warren Buffett
    Ryan Moeller
    Replied over 9 years ago
    Great lessons and article Andrew. There was no sustainability. Everyone with a pulse could get a loan 4X what they could qualify for during the boom and everyone became a real estate investor. I have always liked doing the opposite of the herd, justifying it with due diligence of course. When something is hot, it is usually too late. When something is hurting then opportunities are abound. Again the facts must justify this but the most successful investors follow this pattern. I really enjoyed your article. Great info, sustainability is a must. What I also like and completely agree with is having enough cash flow as well. This gives you multiple exit strategies or backup plans for worst case scenarios which really mitigates risk. Minimize risk, maximize annual return to me is the name of the game and many do it by doing the opposite of the masses or simply buy low sell high. I look forward to your future posts.
    Andrew C. MacDonald
    Replied over 9 years ago
    Ryan, Thanks for reading, everything you’ve said is so true. This is a long term game, so its important not to become irrational when the markets get excited. Cheers, Andrew
    Replied over 9 years ago
    Wow, very interesting graph. Canada and Australia had very small drops in housing prices, and Australia’s have increased a lot since 2009. That looks very unsustainable.
    Andrew C. MacDonald
    Replied over 9 years ago
    Australia is starting to have some trouble now. If you look at Canada, you see there was never such a bubble which is why we escaped the recession relatively unscathed. Putting things in perspective helps us to draw out these important lessons from the past.
    Gloria D. Wilson
    Replied almost 6 years ago
    As an individual who was on the other side of the bubble – trying to help those who had gotten caught up in the hype save their American dream – I saw the whole thing from a slightly more emotional, less clinical standpoint. I saw those who had been sold on the viability of buying properties at unconscionably high prices – primarily with the cash flow profitability dangled in front of them, based on super high rentals that were supposed to carry the mortgage – one they could not have otherwise afforded. However, the real story was that, given the neighborhoods in which these over inflated properties were being sold, there were few, if any who – at that time – could afford to pay those over inflated rents – the courts were as full of tenants being evicted for not being able to pay the rents, as there were wannabe landlords now facing foreclosure. So, I am quite cognizant of the fact that if it doesn’t flow, it’s a no go. And it also means that I cannot post rents that are unaffordable just to carry a property that is unaffordable – so sustainability is absolutely the key. I would far rather collect lower rents from good tenants over the long run and get a decent return on my investment, than try to squeeze them to death in order to eke out the perceived profit – I guess what I am saying is this – I’m interested in being in owner occupant initially – in a triplex or quad – but eventually these will morph into fully rented properties, and I will either live in a single family or condo – however, I never want to have to go thru the nightmare of wondering if Mr. or Ms. So and So are going to be able to come up with the duckets – or am I going to have to sweat it out. The bubble that burst in the faces of so many people cause chaos and devastation across the Nation; but on the ground, the neighborhoods that were ground zero are still reeling (not healing) from the scars. Thanks for the article – those countries that saw little of this debacle are to be congratulated.