Fellow blogger Ben Jones writes a blog dedicated to the housing mania sweeping the globe. For Exhibit A, check out this LA Times story and Ben’s comments on it. I can’t believe that someone would cash in their retirement funds to buy a piece of land that produces no income solely based on the “greater fool” theory. But this is precisely what many people are doing, in addition to taking out home-equity loans for consumer purchases. I have a feeling this is all going to end very badly.
The Globe and Mail newspaper recently ran a story comparing the housing boom to the dot-com madness. Analysts derived a P/E ratio for housing based on how much income a house can produce and found that the P/E ratio is at record highs. In the above example from the LA Times, there is no P/E ratio because there are no earnings to begin with. Sound familiar?
A note of caution about using P/E ratios for housing: By itself a P/E ratio is meaningless. P/E ratios will vary based on the current interest-rate environment. In Canada, we still have historically low interest rates. For instance, a recent RBC Economics report finds that housing affordability is still very good across Canada.
Finally, check out this cartoon from The Economist magazine.
