By John Carney
House prices will eventually stop falling, probably in about two years. But will they ever recover to the levels we saw during the heights of boom? In some areas, prices might climb that high again. But for most markets, such a recovery will probably never happen, and would take decades it were to occur.
In an essay published today, Charles Hugh Smith explains that the bubble vaulations are probably never coming back.
Once the bubble in an asset class pops, it never reflates. "It is simply a truism that bubbles never reflate, ever. Tulip bulb valuations did not rise to stratospheric heights after the Tulip Craze popped, and the Nasdaq dot-com bubble did not reinflate, either, for the very good reason that bubbles are never based on rational valuations--they are based on the psychological state of mania which cannot be reinstated once lost," Smith writes.
Inflation destroys the gains anyway. Even if prices start to climb, they'll be battling against inflation. With all the new government debt being issued, we're likely to face a big jump in inflation. This will means that even if your house is worth as much as it was in 2006 four years from now, in real terms it will have lost value.
If we somehow avoid inflation, deflation will mean house prices keep sinking. "I"In deflation, debt grows ever more burdensome as money becomes more valuable and wages and income drop. As a result, assets dependent on debt ( that is, real estate) drop in value. In deflation, real estate become a "capital trap" which loses value as cash gains in value. As incomes plummet, so do rents, i.e. the income stream which real estate earns, further impairing its value," he explains.
The combination of low interests rates and loose lending that fueled the boom is dead. The government is pushing down interest rates, cramming down mortgages and halting foreclosures in hopes of re-inflating the housing bubble but it won't work. It took loose and even fraudulent lending to push prices as high as they went, and those practices are dead thanks to closer supervision and the financial collapse. What's more, interest rates are sure to climb higher again "once the rest of the world either runs out of cash or the desire to give us all their surplus capital."
Demographics. All probable future population growth can be easily accomodated with the existing housing stock, which means that there won't be some population growth led surge in prices.
This has important policy implications. It means that policies built around the confidence that house prices will recover are bound to be costly failures. Money spent to re-inflate the bubble will be lost. And until we become adjusted to permanently lower house prices, the broader economy will continue to suffer. For one thing, we're going to have to go back to creating wealth in ways other than selling our homes.