Tiny Bubbles Make Me Warm All Over – European housing bubbles, student loan bubbles, even China bubbles

Actually, these bubbles aren’t tiny like the ones Don Ho sang about, and they don’t make me feel warm and fuzzy either. They’re great big bubbles that make me pop….

European housing bubbles

While the world has been focusing on the PIIGS nations with their heavy national debts and straggling economies, Northern European nations have whipped up a nice housing bubble of their own. Apparently, they believe they are impervious to the economic disaster happened in the U.S. in 2008. Unwilling to learn a lesson about top-heavy debt, many European nations have continued the very lending practices that the United States used to create this global bust.

Finland, Sweden, Norway, Switzerland, Belgium, the Netherlands, the U.K., France, Austria and even Germany are all willing participants, albeit for different reasons. As with the U.S., their property prices escalated rapidly from the mid 1990’s to 2008. The median house price across Switzerland is now a whopping US$850,000. Because their housing economies dropped but did not crash in 2008 like the U.S. did, these nations continued the same lending policies as the U.S.. Unwilling to accept the truths they could have learned by example, they turned their interest rates lighter than air in order to re-inflate their bubbles when they slumped in 2008.

Swiss National Bank Chairman Philipp Hildebrand warned that, “A rise in real-estate prices is among the greatest threats to Switzerland’s economy.” (The Bubble Bubble)

U.K. housing prices rose 11% in the year preceding October 2011. The U.K. on average has hit housing values that are 128% of the historic housing-price-to-income ratio. In the last couple of months they have begun to fall. What pushed London prices up so much was that London became the safe haven for Middle Eastern sheiks who sought to avoid the turmoil brewing in the own nations, buying expensive London homes as refuges and investments. London property has also been referred to as a “laundromat for Russian money.”

French housing bubbles like champagne

Paris saw an explosion in housing after 2008 with some areas rising as much as 27% annually. France’s boom was fueled by a tax law that sought to shake the old economy into foaming over. In another attempt to bring the economy to maximum bubbliness, mortgage rates were pounded from 6.5% in 2008 to down 3.5% in 2011.

While the U.S. tried re-energizing the old housing economy the same way with low interest rates, Paris actually succeeded. The cork-popping news for the French is that French property can now claim to be more overvalued than anywhere in Europe. This burst erupted without a corresponding rise in income, however, which makes it rather frothy at the top. The year Twenty-twelve brought the first wind that might blow the froth off the top. New loans fell 27% year-on-year in January. The rapid decline in value looks even more brutal if you compare December 2011 to January 2012, a one-month spread with a drop of 49%!

“It’s a blow. The fall is comparable to 2009, when the U.S. subprime crisis,” said Michel Mouillart , professor of economics at the University of Paris West and industry expert. (“World Housing Bubble“)

The French fall corresponds perfectly with the deep recession that was predicted for Europe in the first half of 2012. In the run-up to these events, a Paris-base economic development organization warned, “There is a risk that a prolonged period of easy finance could result in a price bubble.” Gee, yathink? That’s what happened here in the U.S. Are European governments and banks truly surprised to discover that their bubbles created by loose credit pop just as easily as U.S. bubbles? Must have been French arrogance that made them think the froth on their champagne as they toasted their housing success would hold up any better than the froth here in the U.S.

German housing prices goose-step upward

Stalwart, economically sound Germany didn’t want to miss this action either, so it goosed its central bank into offering ultra-low interest rates when the economy got rough. It seems the answer around the world to an economic crisis that was first created by flimsy, cheap credit is flimsier, cheaper credit to keep the old economy marching as long as possible.

With interest rates so low and banks leaning hard into the curve to hold their ground, German investors are currently pulling their money out of bank accounts and investing it in real estate. Property prices in Munich and Hamburg rose 11% last year. Some desirable rural areas rose by as much as 30%! Is that not the American housing climb all over again?

So far, Germany is holding the high ground, but it’s choice to enter the wunderwelt of cheap finance came late in the game, so its toppling may also come late. It’s strength compared to other European nations will help it hold this position longer.

The Great European Recession

Some of these European nations barely burped when the Great Recession hit and the U.S. went into housing anaphylaxis. In all cases their acceleration of housing markets has hugely outpaced wages. Clearly that is not sustainable. Most of these nations intentionally fueled this rise with the lowest interest rates in history, learning absolutely nothing from the U.S. debacle. Europe thought it would power right through the Great Recession. If last year proved this to be unlikely when housing prices in some areas began to recede, 2012 with its pan-European recession will be Europe’s 2008.

If it is unsustainable for housing prices to rise much faster than wages, what will happen now when wages are contracting in a recession that has clearly overtaken Europe at last? I believe all of Northern Europe going to convulse this year. The IMF warned,

There is significant risk of a decline in house prices in coming years, even in a relatively benign economic scenario. *

Europe is in anything but a benign economic scenario. By experience in the U.S., we know what will happen to European banks when mortgages go underwater. Europe’s situation is much worse than the U.S. in 2008 because its banks are already in deep trouble due to being heavily invested in the U.S. mess. So, if you think European banks have trouble now because of U.S. investments and because of Greece, Portugal and Ireland, how much more so when European housing bubbles all begin to pop now that unemployment is rapidly rising? In some places, like Finland, over 90% of the mortgages in the nation are those ticking time-bombs we call ARMs (adjustable rate mortgages). ARMs played a major roll in the U.S. housing collapse.

So far, Ireland holds the title for the worst housing collapse in Europe, but that is only because theirs has already played out while housing in other parts of Europe continued to rise … until 2011, especially the last month or two of 2011. It’s that imminent. Europe stand now where the U.S. did in early 2008.

Outside of Europe, Japan, China, New Zealand and Canada have also seen recent contraction in their housing market in sales and prices. Canada’s housing in some cities like Vancouver is perched precariously higher than the U.S. was in 2007, and Canada’s banks are more leveraged than U.S. banks were. So, while the economic news for the U.s. housing market has bumped up a tiny bit for the first time since 2008, numerous other nations are on the brink of showing us how well they can do what the U.S. did first, but on a grander scale!

Student loan bubbles

The popping of the student loan bubble is a simple prognostication, and this bubble is more like a universe in size. The math of impending disaster is simple: tuition has skyrocketed in the last decade. So has the number of college students who graduate and cannot find career-level jobs that enable them to make their student-loan payments. In other words, the people who are beginning their careers with the highest debts college graduates have ever known are also launching into the worst job market college graduates have ever known. That has to be bad chemistry. You do the math. A couple of months ago, I put a news article in The Great Recession Blog sidebar, that said,

More than 80% of bankruptcy attorneys say the number of their potential clients with student loan debt has increased significantly…. And there is little hope these canadian online pharmacy fast shipping debtors will get out of their obligations…. “Take it from those of us on the frontline of economic distress … this could … be the next debt bomb for the U.S. economy….” Nearly 25 percent of bankruptcy attorneys said they’ve seen potential student loan client cases surge by 50 to more than 100 percent. (Huffington Post)

How big is this bubble? The Huffington Post article puts it at over a trillion dollars! That makes it larger than all credit-card debt in the nation. As the guarantor of many of these loans, Uncle Sam is on the line. So are state governments. In other words, everyone is affected.

If the economy doesn’t make a significant recovery quickly so these young men and women can get high-paying jobs, this bubble WILL pop! How can it not? So, it is a time bomb. These students took out these loans in good faith that they’d be able to pay them back because they’d have good careers. Everyone encouraged them to make that bet on a college education, then the nation took the opportunity of jobs away from them because of its years of profligacy in housing market speculation and in financing our national budget with debt even during the good times.

I used to argue that we should be paying down debt during those good times, for if we cannot do it in boom years, when can we? Instead, the nation sought as policy wholey supported by the U.S. electorate, to turn the good times into extravagant times by letting some future generation pay for our ride to prosperity. That future generation is the present generation of college students who are coming out of expensive educations to a world bereft of good employment opportunities.

Many of those student loans are probably entering default right now because a student loan is considered in default when no payments have been made for nine months … about the amount of time last year’s college graduates have been without a job since becoming liable to start payments on their loans. Perhaps, unable to find jobs, these graduates will go back to school for another couple of years to double down on a higher degree in order to stop their payment requirements for the present, hoping the job situation will improve by the next time they emerge. If so, the defaults will be averted for the time being.

What are some of the other economic bubbles?

I think the biggest bubble is the stock market. It’s been fueled by two rounds of quantitative easing that created trillions of dollars of money out of thin air. Undoubtedly some of that money has fueled speculation in the stock market.

It appears to me we are repeating the dot-com crash with the unreal prices paid for social media websites, which has created kid billionaires. Twitter barely even functions right for what little it actually provides. Some of these sites have little actual revenue. Yet, their IPOs rake cash from the clouds. Kids that can’t even shave are selling companies for billions of dollars that have never made a profit! And people are only too anxious to buy! We saw this kind of market euphoria give way overnight in 2002, but we’ve learned nothing and are already repeating the mistake.

China is another huge bubble. Already manufacturers are moving in significant number out of China and back to the U.S.. It turns out that, when you give people a little freedom and better lifestyle, they want more of it. They’re not content to remain paupers, so they become bubble poppers to the dreams of the rich by demanding higher wages and better conditions. Chinese labor is no longer the bargain it was, and corporations are returning from their binge on cheap labor as the Obama administration offers incentives for their return. Others are looking for the “next China.”

China, in the meantime, has built entire cities under central planning that are now emptying out … or that never filled up. These will become future slums or ghost towns because the jobs are moving away that supported them. On top of change in the balance of labor costs between nations, you have the drying up of the European economy mentioned above. That is going to significantly diminish Chinese exports.

China, however, has a lot of surplus cash tied up in U.S. bonds still and a lot of gold, so it has room to maneuver. That makes it hard to say how China may fall, but some cracks are showing: China finally reported a significant slowdown in housing, which it wanted because the housing boom was moving toward the possibility of ghost towns, but there have also been rumors recently of a coup in Beijing. So, all of this economic change creates political instability.

Where will we be when all the bubbles settle?

The U.S. now lives off the blood of its future generation. We pump oil like no one else will ever need it. So long as it lasts our lifetime, that is all we care about. We reinflate old housing bubbles by setting interest as low as it’s been since the Great Depression and then still add adjustable rates to tweak interest even lower. We do this in desperate hope of luring citizens to take on more debt in order to bid the prices of homes back up so that banks don’t have to write them down so much.

Never mind that that means the next generation will never be able to afford them. We are doing all we can to avoid letting housing prices decline to something one might hope to buy in a reasonable timeframe again with a secure downpayment. The twenty-year mortgage was lost in the 90’s to thirty-year mortgages. Now we are actually seeing forty year mortgages offered. Soon we will be where Tokyo is with fifty-year mortgages … except for one thing: I believe this effort will collapse entirely.

There were voices decrying this exorbitant spending beyond our means. Three years before the present economic collapse, the L.A. Times reported that the phrases “housing bubble” and “real estate bubble” were surging as search inquiries on the web. Likewise, they reported, media attention had begun to focus on the concern that rising house prices were no different than the dot-com bubble that had burst a couple years before. Yet, here we are trying to recreate it because we have not economic creativity.

Therefore, our nation is without excuse for its present calamity because its citizens and its leaders chose to ignore the prophets of doom and gloom and voted, instead, to bank their chips in ever higher stacks of debt.  (While there have always been many false prophets of doom and gloom; there are also those who simply see clearly and speak clearly what few others want to see or hear. They are written off as “prophets of doom and gloom.”) Most people in the U.S. ignore those voices still and tune in to the same old economic experts who talk of a “recovery” as if one is actually happening. These popular voices completely missed the crash of 2008, but they remain as popular as ever on all the news broadcasts.

I cannot bring myself to join that hallelujah chorus. While Europe’s central bank president just sang that the euro zone’s worst troubles are past, news came out the same day that the euro area is sliding back into recession. With so many bubbles everywhere, I see the global economy as riding on nothing but froth created by nothing but scum. So, I don’t know why anyone would assume sustainable recovery is in the air. It’s hard for me to understand why people even listen to the voices that missed all of this. It appears they only want to hear good news.

For myself, I’d rather see the truth, whether it is a truth I like or not. I find it absurd to think the Great Recession is anywhere near a road to sustainable recovery.

How to make money while the rest of the world is losing it:

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Resource articles

World Housing Bubble – China, Australia, Vancouver Real Estate News

The Post-2009 Northern & Western European Housing Bubble

Housing ATM Theory and Finland’s Property Bubble

Global housing markets struggling

A Canadian Housing Bubble?

Global housing market downturn gathering pace

Here is the Next Bubble (Actually, the Next Eight Bubbles)

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