From Volume 4, Issue Number 32 of EIR Online, Published Aug. 9, 2005

World Economic News

Press Warnings of Real Estate Crash in Europe

Each day the European press is filled with new warnings of the danger of a real estate crash. The Berliner Zeitung warned Aug. 3 about the "gold rush into real estate," noting that, since speculators pushed housing prices up to astronomical levels, there is a threat of a global crash. (Note that eastern Germany, and especially Berlin, were hit by a big real estate crash in 2000.)

Much of the Berliner Zeitung's material was taken from a June report in the London Economist, which began starkly: "The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops."

The Economist continued: "Never before have real house prices risen so fast, for so long, in so many countries.... Rising property prices helped to prop up the world economy after the stockmarket bubble burst in 2000. What if the housing boom now turns to bust?... The total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history."

The U.S. has some of the worst house-price inflation (in some areas worse than a 20% rise per year), but Europe, especially France, Spain, and Ireland also have inflation ranging from 9%-15%. However, the British and Australian housing bubbles have "cooled rapidly." In the bubble nations, "house prices have hit record levels in relation to rents," and are "at record levels in relation to incomes." A big danger is the high rate of house owners buying for "investment": investors rather than occupiers are more likely to sell out in case of price falls, prompting further falls.

"The housing market has played such a big role in propping up America's economy that a sharp slowdown in house prices is likely to have severe consequences," the Economist warned, citing Japan as a "nasty example."

German Financial Times Worries About 'Abundant Money'

"Abundant Money" reads the headline of a two-page feature in the German-language Financial Times on the emerging of new financial bubbles all around the globe. It notes that the Federal Reserve and other leading central banks have flooded the financial system with liquidity after the crash of the stock market bubble in 2000. Another, secondary source of liquidity for the markets has been the "pension reforms," directing additional money flows into the large funds.

In the meantime, the effects of this liquidity pumping have reached such a dramatic dimension that even the very same central banks, in line with international institutions like the BIS or the IMF, are now fearing ugly consequences. As an example, the BIS recently expressed its growing concern on "excessive liquidity," while the Fed pointed to "excessive risk taking" by investors. The ECB has warned on housing bubbles in various euro-zone countries. Dresdner Bank has put out a report acknowledging a "global liquidity excess" in spite of the recent rate increases by the Fed.

According to the London Economist weekly, the valuation of housing markets in the leading economies has more than doubled in the last five years, that is it increased from $30 trillion in 2000 to $70 trillion today.

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