Friday 21 March 2008

The 2008 banking crisis

The 2008 banking crisis: Why the housing bubble? Why the crash? by Peter de Waal Over the last three decades the economies of the western world have been driven by an expansion of credit rather than wage growth. And suddenly access to credit is now being switched off overnight as fear grips the rich over the US sub-prime mortgage losses. The house price boom was a global phenomenon coinciding with the low interest rate policies of the central banks of big economies, particularly the US, after the dotcom bust and 11 September 2001. However, a report published by the OECD in 2006 warned that the boom was out of step with economic fundamentals. (See Figure 4 shows how the price to income and price to rent ratios have shot past the trend line since 2001.) As with most other countries you can see that the NZ rents and income curves follow each other closely. So if house prices are rising it does not follow that rents will increase if incomes are static or falling (a fact apparently lost to many amateur property investors).
Typically though, falling rental yields have been masked by asset appreciation. Many landlords who have moved into “property investment” in the last five years have only been breaking even, many have been losing money from day one on the basis that capital appreciation will see them right. However, once the asset class price starts stagnating or falling (e.g. studio apartments in Auckland) the illusion of capital gain can no longer mask the cash drain. Yesterday’s cheery “can’t go wrong with property” speculator is today’s stressed seller, buying food for his family on his credit card because all his income is sucked up by an empty property he can’t let at a rate that covers the mortgage on it...

1 comment:

Vaughan said...

Great one. Usually economic dissertations make my eyes glaze over. And not being a home owner, cynically, I didn't feel that personally concerned with the housing crisis.

However on reading this article I know at least two close friends of
mine who need to see this. One a new homeowner with a young family, who recently borrowed massively to buy his house. And the other a solo mother who has been slowly (and painfully) paying off her mortgage for the last 20 years.

Far out. I have read Gaynor and a lot of other the contributors to the Herald on the sub-prime market collapse, but this article has really nailed it. And put the heart back into the sterile boring mainstream reporting on this crisis. And also put into a form that even an ill educated lunkhead
like me can understand.

This needs to be circulated as widely as poss.

Pat O'Dea