Another Housing Market Bubble Brewing
Well well well….now we know what topics the media like to highlight and what readers like to read about. Having diligently posted every week without fail for over two years now on all issues macroeconomic, interest rates and labor market, and having never achieved a readership higher than roughly one man and his dog, it was interesting to see that the instant one wrote about remuneration that article got re-posted to all manner of website, many of which I'd never heard of! So now we know what the topics of interest are!
Back to normal topics this week. We have spoken often about central bank monetary policy and the danger of creating a crutch for investors that will be more difficult to pull away the longer it goes on. Now there are worrying signs this reliance is spreading to other markets.
Equity markets around the world have been hitting all kinds of highs this month. And then last week the merest hint of pulling back from central bank support, uttered by Fed Chairman Ben Bernanke, saw these same markets selling off. It's clear that equity prices are being driven upwards by central bank action. Even though the Fed isn't expected to raise rates before 2015 at the very earliest, that comment was too scary for equity bulls.
We won't discuss equities further as we discussed them only recently. But there are more worrying signs elsewhere. Yesterday's U.S. Case-Schiller house price index showed another move upwards, and as reported in piece of JPMorgan research certain urban locations such as San Francisco and Phoenix showed rises of over 20 percent from a year ago. These are quite breathtaking increases. Do they suggest sustainable recovery or just another bubble brewing? Admittedly these are house prices rising after a large-scale bust from 2007-2008, but under any circumstances such rises should cause eyebrows to rise.
Is there a connection here with low interest rates and quantitative easing and central bank asset purchases? Absolutely. Continued loose monetary policy has seen the bubble move from equities to real estate. It isn't a direct linkage, it's more subtle than that, but one can see how cheap and plentiful liquidity is having a knock-on effect on other asset classes. The single biggest causal factor – out of many significant ones – of the 2008 crash, the real-estate crash in the U.S., is in danger of rearing its head again before the global economy has even returned to sustained recovery.
We need more of those Bernanke pronouncements, and we need them from other central banks too. This "QE" has to start being reined back, interest rates need to rise by 2015, when such a move would not take anyone by surprise, and no later. If they could start to rise earlier, then so much the better. And is a rise of 25 bps really going to spike the equity markets? Not for longer than a few days. It's a sign of a strengthening economy, but it has other benefits too: spiking asset bubble risk.
There's a saying that society never learns from history, but the bull market build-up of 2002-2007 wasn't exactly a long time ago. The last thing the economy needs, in any market, is another asset bubble built on the house of cards that is QE.
Professor Moorad Choudhry is at the Department of Mathematical Sciences, Brunel University and author of The Principles of Banking (John Wiley & Sons 2012)