And location. That, famously, is what real estate is all about. Although this column discussed the ongoing slump in the American real-estate sector very recently, it’s worth looking at the topic again, this time from a global – and also from a local – perspective.
An excellent place to start is RGE Monitor, the website-cum-blog established by Nouriel Roubini and now firmly esconced as one of the most widely-read and most influential fora for economic analysis and discussion. The site’s own newsletter this week gives a broad overview of the state of real-estate around the world which, whilst not terribly encouraging – as indicated by the headline “No Signs of Stabilization?’ – at least highlights the fact that there are major differences between countries. Thus, although ‘location, location’ can relate to properties even in the same neighborhood, it can also apply to a much wider geographic context. For example, Central and Eastern Europe (CEE) can be viewed as a ‘neighborhood’ from a global perspective, yet within that general area, property prices in Latvia have been amongst the worst hit anywhere in the world – down 36% in the year to March 2009 – whilst the Czech Republic has actually seen prices rise (up 10% in the same period).
The real-estate sector has been, and continues to serve as, the proximate cause and primary factor in the wider financial and economic crisis. The deadly cocktail of cheap money, lax lending standards and lax-to-non-existent supervision fuelled the bubble in house prices and the parallel boom in residential construction. — not just in the US, but in numerous countries around the world.
However, as Robert Shiller — one of the most prescient economic analysts of this sector — noted last year, the true causes of the housing bubble must be sought at a much deeper level. He pointed out that the housing booms in the US and UK ran almost in tandem from the late 1990s through to 2005/6, yet monetary policy and hence interest rates in these countries during this period followed very different paths. In other words, it is quite facile to point to Greenspan’s policy of holding interest rates at very low levels in 2003-04, as ‘the cause’ of the bubble – because the UK managed to generate its own bubble without this facilitating factor. The ultimate cause of the housing mania of 1995-2006, as of every financial mania in history, lie in the realms of sociology and mass psychology: why do entire nations succumb to bouts of collective madness and come to believe that they can get rich effortlessly by buying condos in Miami, or tulips, or shares in ventures in the South Sea or in cyberspace?
Whatever the ‘true’ causes of the real estate boom as a socio-economic phenomenon, they were not at work universally. Even within Western Europe, which was one of the worst-affected areas, the stolid Dutch and sober Germans were not swept up in it – although the supposedly-canny Swiss were. But where the madness caught on, its impact was deep and the disaster it caused is correspondingly great. Spain and Ireland, two countries with little obviously in common except, perhaps, their Roman Catholic background and late arrival in the global economy, have been the worst hit. Their unemployment rates are soaring, their banking systems are in dire straits and their governments are at their wits end as to how to climb out of the black hole that their economies are falling into. Interestingly, Spanish and Irish ‘investors’ became the main players in the booms in Hungary and other CEE countries – arriving after many Israeli entrepeneurs had already spotted the potential these markets offered.
One reason the housing boom in places like Ireland and Spain was so exaggerated is that the countries’ demographic fundamentals did not justify the massive increase in the housing stock that the boom triggered. The influx of immigrants, especially in Ireland, has proven to be a transient phenomenon, but the houses built supposedly to accommodate them have not accompanied them back to Poland and Romania, instead remaining firmly grounded in Kerry and Cork. The fashionable fancy of the boom years saw financials as the key factor driving the construction and purchase of houses, but in the long term it is demographics that is the critical element.
Which brings us to Israel. In a recent blog item (http://cgis.jpost.com/Blogs/landau/) I highlighted the unsung hero of the Israeli economy over the last half-year of recession – the residential construction sector. There is no boom underway there, but there is also no bust – not surprising, since the last boom ended 13 years ago. But the underlying demographics means that there is pent-up demand for new housing in Israel, although this is not going to burst forth while unemployment marches higher and people fear for their jobs. Indeed, in the short term, these pressures could push prices down. But because there is no inventory of unsold apartments overhanging the markets, whenever that repressed demand comes to the fore prices will have nowhere to go but up.