Economist Stephen Roach of Morgan Stanley is concerned about the asset bubble that hasn't popped yet, the real estate bubble:
Thereís one key aspect of the above that does represent a change in my thinking -- that America is now in the midst of a property bubble. I havenít come to that conclusion lightly. Two piece of evidence have pushed me over the edge: First, the sleuths at The Economist report that inflation-adjusted US house prices have "risen more in real terms since 1997 than in any previous five year period since 1945." Second, thereís an excellent study by Dean Baker of the Center for Economic and Policy Research (CEPR) that comes up with a perfectly reasonable way of assessing whether this surge in house prices qualifies as a bubble, or not. The CEPR test hinges on the relationship between housing rents -- the intrinsic returns on the asset -- and market-clearing home prices. Baker finds that inflation-adjusted house prices have risen by about 30% since 1995 -- literally three times the cumulative 10% rise in the real rental index over that same period. In fact, this gap between house-price and rental inflation has never been wider in the post-1975 history of these data. If thatís not a bubble, I donít know what is.
|Share |||By Randall Parker at 2002 September 23 10:56 PM Economics Political|