|
What...me worry?
Michael Hlinka
You may not recognize the name Robert Shiller, but I'm guessing if you're involved in the business world, you're pretty familiar with the phrase "irrational exuberance."
This is how Alan Greenspan characterized stock market behaviour in a December 1996 speech. As it turns out, Robert Shiller, a Yale economist, wrote a best-selling book. It demonstrated, with extensive research, that by all historical standards, the stock markets were indeed, greatly overvalued.
Shiller published Irrational Exuberance in March 2000--the height of the tech bubble. He just came out with a second edition of the book. But this time around, he's not warning about stocks. Rather, Shiller believes there's a worldwide bubble in real estate prices.
He's an American-based economist and the majority of his research is home country centric. He offers some compelling evidence that when it comes to housing prices, something really is up...if you pardon the pun!
Home prices in the US, adjusted for inflation, increased by 52 per cent from 1997 to 2004. In 1985, the median price of a home required 4.9 years of per capita income. This rose to 7.7 years in 2002.
According to Shiller, these statistics are completely out of whack historically and it’s likely house prices will "correct" down. In other words, the market is due for a crash!
Nobody is going to argue this would be a good thing. But my thesis is even if Schiller is correct and housing prices come down significantly in the US and around the world, it will hardly spell disaster for the economy.
Let's keep in mind what will accompany a slowdown in housing: falling interest rates. You could argue competition for money with consumers has meant funds are more expensive for businesses that wish to invest in productive capacity.
And of course, as those interest rates fall, this will have the effect of supporting housing prices. Monthly mortgage payments would also fall for the average family, improving affordability.
There should have been an important lesson learned from the stock market bubble. Alarmists worried that a steep market decline would plunge the world into a prolonged recession.
But with 20/20 hindsight, we see the bigger problem was unnecessarily high interest rates that throttled what a dynamic, market-based economy is all about--producing goods and services of real value.
The recent boom in real estate means more and bigger and better housing than ever before. Robert Shiller may very well be correct again in predicting a bubble in one particular asset class, but even if he's right, it appears to me there’s nothing to worry about.
Michael Hlinka provides daily business commentary to CBC Radio One and a bi-weekly column that is syndicated across the CBC network. He also conducts financial planning courses.
|
