Nouriel Roubini was one of the most presciently pessimistic analysts of the global economy in the run-up to the global financial crisis. And now he thinks it's happening again.
Roubini doesn't see bubbles in the places where they were most severe in the pre-2008 period. He doesn't mention the United States or Spain or Ireland. Rather, Roubini sees housing prices getting out of whack in quite a few small and mid-sized nations that are well-governed and managed to avoid the worst economic effects of the financial crisis: Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand and the London metropolitan area in the U.K. He adds some key emerging markets that show the same dynamic: Hong Kong, Singapore, China and Israel, and major urban centers in Turkey, Indonesia, India and Brazil.
In this view of the world, a better question might be where in the world is there NOT a housing bubble (the answers, apparently, are the United States, southern Europe, Russia and all of Africa).
Roubini's argument boils down to this: The major economies have been growing only slowly. Yet with low interest rates and aggressive central bank action across the globe, there is a giant pool of money that has to go somewhere. That somewhere has not been productive new investments, like companies building new factories. Rather, it has come in the form of people taking advantage of cheap credit to bid up the price of existing real estate in cities from Stockholm to Sydney.
It seems notable that the bubble markets of the last cycle don't fit this story. It's mostly the countries that managed to avoid price runups last time that are experiencing it now. Here, for example, is the price of new homes in Canada over the past decade
Contrast that to U.S. home prices, as measured by the S&P/Case-Shiller 20-city index, over the same period.
It is a completely different pattern. Prices in Canada have been moving up in a more or less straight continuous line, pausing only briefly during the worst days of the financial crisis, whereas the U.S. prices experienced a devastating boom and bust. U.S. home prices are still far below their 2006 peak (and even further below when adjusted for inflation), whereas Canadian prices are reaching new highs.
All the more worrisome, if you are a policymaker or just somebody who doesn't want to see the world economy blow up (again), is that the continued rising prices are being accompanied by rising consumer debt in many of these countries. Here, for example, is Canada's household debt to GDP ratio:
As it shows, Canadians are taking on ever higher debts relative to the size of their economy, a phenomenon driven heavily by mortgage borrowing. They are thus leaving themselves unusually vulnerable if interest rates rise or housing prices fall. By contrast, in the United States, after running up enormous household debts before the crisis, the level has been falling steadily relative to the size of the U.S. economy since then.
The lesson that global policymakers learned from the last crisis is that regulators must lean against housing bubbles, using the tools they have to ensure that a correction doesn't cripple their financial system and the broader economy. They are deploying "macroprudential" tools to try to prevent possible bubbles from getting out of control: requiring banks to insist on higher down payments, for example, and insisting that the banks hold more capital against their mortgage loan portfolios.
But the fact that prices keep rising in these markets, even amid regulators' efforts to contain them, should give some pause. Roubini writes: "Many banking systems have bigger capital buffers than in the past, enabling them to absorb losses from a correction in home prices; and, in most countries, households’ equity in their homes is greater than it was in the U.S. subprime mortgage bubble. But the higher home prices rise, the further they will fall – and the greater the collateral economic and financial damage will be – when the bubble deflates."
So should this fact: One of the countries with the most severe housing bubble in the past cycle, Spain, actually was a pioneer in some of these macroprudential tools. The Bank of Spain put in place countercyclical capital requirements before countercyclical capital requirements were cool. But it clearly wasn't enough to stop the bidding up of Spanish real estate, and the country remains in a depression today as a result.
What we're seeing right now in the countries with possible housing bubbles is a test of the theory that has been popular at the Federal Reserve and other global central banks over the past few years: that proper use of regulation can keep easy money policies from creating dangerous bubbles.
Perhaps scariest of all, if Roubini is right, is that if these are bubbles that eventually pop, policymakers will not have the tools they had in 2008 to cushion the blow. The world's central banks, in particular, don't have much (arguably any) room to lower interest rates further. Which means that if these regulatory tools aren't up to the job, when the next global financial crisis comes, we can all take a lesson from the creators of "South Park." It will be time to Blame Canada.
Update: This post's headline originally said 18 countries. I had counted Hong Kong and China separately; in fact Hong Kong is a special administrative region of China.