The real estate market and the bubbles in pairs
The best indicator of the absence of a real estate bubble is precisely the badly named “rent bubble” that is so much talked about now.
In recent times it seems that the ghost of the housing bubble has been reawakened. But although many indicators of the real estate market grow rapidly are still, in absolute terms, well below the values reached at the peak of the bubble (transactions, housing starts, contribution of the construction sector to GDP, mortgage credit, etc. ). The latest available data indicate that the price of housing increases to 6.7%, although in some cities it reaches two digits. However, it is still 26% below the 2007 maximum, standing at the level of June 2004. Certainly this is not enough to justify the absence of a bubble in formation, or perhaps smaller than that reached in 2007.
The best indicator of the absence of a bubble is precisely another “real estate bubble” that has been talked about a lot recently: the so-called “rent bubble”. From the economic point of view it does not make sense to speak of bubbles in the profitability of an asset, in this case housing. In fact, one of the clearest indicators of the bubble of the past, besides the spectacular growth of credit, was precisely the low profitability of the rent. At the worst moment it came to be below 2%. Why would someone want to pay an astronomical price for homes with such low profitability compared to other assets at that time? The only explanation was the expectation that prices would continue to rise without limit, and capital gains would be made on the sale. Why buy instead of rent, and put the money in the bank at 5%? Because of the fear that prices would continue to rise and not be able to buy in the future.
In the end it is these unrealistic expectations about the future growth of prices that feed the bubbles in the presence of abundant credit. In these moments, with returns of 5-6%, housing prices are well justified by the rents. And the granting of new mortgage credit conforms to conservative risk control standards. From the perspective of credit, the reduction of the mortgage debt of the families has been substantial and at present, despite the rapid growth of new mortgages for home purchases, the stock of mortgage credit continues to fall. We will have to be vigilant but, for now, there are no bubbles on the real estate horizon.
Source: “El Pais”