More than one year ago the Economist warned that "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 stock market bubble in the late 1990s… or America's stock market bubble in the late 1920s.In other words, it looks like the biggest bubble in history".
Bubbles always burst, and it’s happening in the United States right now, producing recession, slump and bust. Official figures show that the number of new homes sold in July was 22 per cent lower than a year earlier. "Things do seem to be getting worse very quickly. Freefall is a strong word, but I think it's the right one to use here," says Paul Ashworth, chief US economist at Capital Economics. Ashworth reckons 30 per cent of all the jobs since 2001 - 1.4 million - have been in sectors related to the housing market boom, from construction to DIY stores. As the boom runs out of steam, Capital calculates that 73,000 jobs a month will be lost.
The speculative house-building boom produced the biggest glut in new homes for decades. Sales of consumer durables, like furniture and washing machines will tumble. Over the next several months the long consumer boom will melt away as millions of home-owners are overwhelmed by growing mountains of debt. Buyers have been taking up mortgages of as much as 105 % of the price of the property without any proof of income or other security on the false expectation that prices would continue to rise. Many are tied into schemes that progressively raise the repayments.
The bursting of the dot.com bubble in the 1990s ruined many of those who held shares or worked in the companies concerned. The collapse of the US housing market will damage every home-owning family and many more besides. The global impact will be severe. The speculative housing boom in the US as well as in Britain, Australia, France, Spain and China and elsewhere was made possible by the rapid growth of easy credit. Restrictions were eased to fuel the growth in consumption needed by the expanding corporations as they racked up production during the recent phase of globalisation. Now banks are faced with a rising tide of bad debts and they will turn the screws on the same people they once forced easy credit on.
Gerry Gold, economics editor