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.
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.
photo credit: anieto2k