Housing Bubble...Europe More At Fault Than The US!

One of the great things about reading news originating in other countries is that you realize that the US is not as evil and guilty as you might assume it is, given the reportage of our masochistic Fourth Estate.  Here's a great example (tip of the hat to Mark B. in B.C.).  

Given comments like the headline on the satirical British website The Daily Mash: “Bastard Americans Ruin Your Life”, just about everyone in the US assumes that we caused the worldwide housing bubble, it's subsequent collapse and the resultant financial crisis.  Au contraire mon petite chou.... Neil Reynolds of Canada's "Globe and Mail"has an informed and interesting perspective on the US complicity in this current crisis, and it's an eye-opener for many of us (just disregard Neil's smug Canadian attitude, they'll get their's yet).....

Did the U.S. compel Iceland's three bankrupt banks (which didn't hold a single subprime mortgage) to guarantee 5.4 per cent on foreigners' deposits? Do we make the U.S. responsible for Europe's absurdly inflated housing prices? Aren't smart, affluent Europeans as responsible for Europe's housing crash as hapless, poor Americans? In 2006, after all, one-bedroom apartments in Dublin sold for $600,000 – as much as $125,000 more than they now forlornly list.

When the International Monetary Fund published its world economic outlook earlier this year, it calculated the top-of-cycle “bubble” component of housing prices, which it defined as “the house price gap,” in Canada, the U.S., Japan, Australia and 13 European countries. Among these 17 countries, the IMF determined that only two had a zero (or better) “house price gap.” Canada emerged as one of these, with average house prices 2 per cent less than the fundamental worth. (The other was Austria, with average house prices 6 per cent less than the fundamental worth.) The IMF found that the U.S. did, indeed, have a house price gap at the end of 2007 – a bubble factor of 10 per cent that “could not be accounted for by fundamental economic factors.” Compared with European house price gaps, though, the U.S. gap indicated only modest excess. The IMF put Ireland's price gap at 30 per cent, meaning that Ireland's housing price bubble is roughly one-third above fundamental value.

When the International Monetary Fund published its world economic outlook earlier this year, it calculated the top-of-cycle “bubble” component of housing prices, which it defined as “the house price gap,” in Canada, the U.S., Japan, Australia and 13 European countries. Among these 17 countries, the IMF determined that only two had a zero (or better) “house price gap.” Canada emerged as one of these, with average house prices 2 per cent less than the fundamental worth. (The other was Austria, with average house prices 6 per cent less than the fundamental worth.) The IMF found that the U.S. did, indeed, have a house price gap at the end of 2007 – a bubble factor of 10 per cent that “could not be accounted for by fundamental economic factors.” Compared with European house price gaps, though, the U.S. gap indicated only modest excess. The IMF put Ireland's price gap at 30 per cent, meaning that Ireland's housing price bubble is roughly one-third above fundamental value.

As well, the IMF calculated the mortgage debt of various countries as a percentage of GDP. Canada emerged, once again, as a country without inflated property values. Canada's housing debt was equal to 50 per cent of its GDP. In the Netherlands and Denmark, mortgage debt was equal to 95 per cent of GDP. (Selected other countries: Austria, 80 per cent; Spain, 60 per cent; Ireland, 70 per cent.) U.S. mortgage debt was equal to 78 per cent of GDP, midway between Canada, on the one hand, and the Netherlands and Denmark on the other.

Canada fared well in these (and other) comparisons. But the much-maligned U.S. didn't fare all that badly. (The United States, the IMF report concluded, was among the middle-ranked countries in “vulnerability” to a bubble-busting correction.) Most European countries are decidedly worse off. Some confront the prospect of catastrophic house price crashes; some apparently confront the prospect of bankruptcy. The Baltic countries (Estonia, Latvia and Lithuania) are desperate. Spain is desperate. (Spain built four million houses in the past decade, more than Britain, France and Germany combined – most of them as second homes for affluent Europeans.) Britain, France and Ireland are desperate. House prices are falling in all of these countries – and U.S. subprime mortgages have nothing to do with it. On the far side of every wave, the direction is always down.

So, there you go.  Put away the cat 'a nine-tails, stop flagellating yourself, and  feel better about being a citizen of the USA.  If we can stop the politicians from attempting to fix everything, it will get better.