Blog Real Estate Bubbles May be Brewing

Real Estate Bubbles May be Brewing
Real estate bubbles are brewing in Canada and possibly Hong Kong, said Nobel Laureate and noted real estate expert Robert Shiller.

Global asset prices have decoupled somewhat from economic fundamentals, driven higher in part by investors hoping to weather rapid economic changes and fearing for their futures, Shiller said.

“It seems obvious to me that we are living in a time (where) people are thinking that the job I have today might be obsolete in 20 years,” Shiller said. “Everything is changing so fast.”

This anxiety is also reflected in the “great lengths” parents go to in preparing their children for the future, borrowing “huge amounts of money” to pay for education, for example.

“I think it reflects a deep anxiety,” Shiller said.

Shiller, who co-created the preeminent U.S. home price index - the S&P/Case Shiller Index, warned that the high-flying Canadian real estate market could be headed for a major downturn.

“I think of it as a bubble. Vancouver ... had a dramatic bursting of a bubble in home prices in the 1980s,” Shiller said.  “I think it can happen again” - in Toronto and other Canadian cities as well.

Part of Vancouver’s bubble stems from capital flowing out of Hong Kong, which is undergoing a major real estate boom of its own. 

“Hong Kong has the problem right now that its interest rates are set in Washington D.C.,” Shiller said, citing the HK dollar/US dollar peg. Hong Kong might want to tighten credit to slow down surging real estate prices, but can’t.

Federal Reserve officials say they will likely begin raising benchmark rates from historic lows later this year, as the U.S. economy continues its long, slow climb from the depths of the 2008-2009 crisis. But Shiller said he is “skeptical” that rates will actually go higher.

“From January to January, we had deflation in the United States. So I’m skeptical that they really are going to tighten” in the near term. Shiller said.

Shiller noted that U.S. stocks are “highly priced”, and that better investment opportunities might be had in relatively cheaper Asian and European stock markets.

So where is Shiller investing?

“I am still invested in stocks all over the world. I am downplaying the U.S.,” Shiller said. He also owns some bonds and real estate - outside of the boom areas -  as well as commodities and oil.