The US should look to the UK property story to arm itself against the boom and bust tendancies of the housing market
Jamie Westenhiser, Playboy Enterprises's Playmate of the Month for May, says her disrobing days are over. With house prices in her home of Fort Lauderdale, Florida, up 105% in the past five years, the 23-year-old model told the magazine she is embarking instead on a career in real estate.
US housing is at its least affordable in at least five years, according to a National Association of Realtors index that has tracked median home prices versus incomes since May 2000. Federal Reserve chairman Alan Greenspan said last month he sees "signs of froth in some local markets."
There is plenty of historical evidence from around the world that housing market bubbles do not deflate, they burst. It is the UK that provides the scariest horror story for what can happen when a super-charged housing market comes off the rails.
The average price of a London property almost doubled in the four years before the second quarter of 1989, climbing to £97,667 ($173,000), according to figures compiled by the Nationwide Building Society, the UK's third-biggest mortgage lender. You would have almost quadrupled your money by buying in mid-1979, twice what you could have made in UK stocks during those 10 years.
By the end of 1992, London property was worth less than £67,000, according to the Nationwide figures, a drop of more than a third. Nationally, property prices slumped about 24% from the middle of 1989 to the end of 1992, leaving many people owing more to their mortgage lenders than their houses were worth. Prices slumped as interest rates surged and people started to lose their jobs. From 1986 to 1990, the UK unemployment rate fell by half, reaching a low of 5.2% in April 1990. It took less than two years to climb back to near double figures, surging to 9.9% by December 1992.
The UK government, which was then responsible for monetary policy, had cranked its benchmark lending rate to 15% by October 1989 from as low as 7.5% in May 1988. Even by the middle of 1992, rates were as high as 10%. The ripple effects on the economy were severe. UK retail sales recorded average annual growth of 6.4% in 1988.
Nonetheless, it is tough to criticise US investors, or even Playboy bunnies, for preferring bricks-and-mortar to the stock market. House prices rose an annual 12.5% in the Q1 2005, according to the Office of Federal Housing Enterprise Oversight. In the 1990s, James Carville, a political consultant to President Clinton, said he would rather be reincarnated as the bond market than as pope or president because "you can intimidate everybody." These days, his afterlife profession of choice would probably be the global housing market.
Mark Gilbert, Bloomberg columnist
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