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Say Hello To The Commonwealth's $6.6-Trillion Real Estate Bubble

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There's a massive real estate bubble brewing in the Commonwealth, and I'm dying to see how we get out of this one. Instead of crashing in 2008, countries like Canada, Australia, New Zealand, and the U.K. decided we just needed more money. The governments in these four countries didn't have a few years to stimulate the economy. Instead they repeatedly slashed interest rates so people could carry more and more debt.

The result? Soaring real estate prices, stagnating incomes, mounting household debt and lowered economic output have sent four of the largest economies in the realm into a massive bubble.

Soaring prices

Home prices are soaring really, really fast in the Commonwealth. Since 2003, prices rose an average of 71 per cent. In contrast, those "debt-crazed" Americans only saw their homes rise 47 per cent. Meanwhile, a more balanced economy like Germany only saw their property rise six per cent.

Note, this isn't hype -- hot markets like London, Vancouver, Auckland or Sydney -- places where developers and politicians are claiming they're being Manhattanized. This number includes places like Atlantic Canada, where populations and industry are declining.

Here's how those four countries look when broken down:

The land of moose and maple syrup saw property prices climb 80 per cent since 2003. The average benchmark home price in now CA$456,722 (US$348,403), six times the median household income. Remember, experts say you should spend three to four times your annual household income on housing.

United Kingdom
The U.K. was one of the countries that got hit the hardest during the 2006-2008 financial crisis. Even with that minor setback, prices rose 55 per cent since 2003 to £200,251 (US$260,064). That's around nine times the median household income.

Since 2003, Australian home prices are up 65 per cent. While still below the average, the average benchmark home is now AU$623,000 (US$475,165). That's more than nine times the median income.

New Zealand
New Zealanders had the highest rise in prices of the group. The average benchmark home is now NZ$612,527 (US$443,797), a whopping 84 per cent increase. Again, that's nine times the median income.

Stagnating incomes

There's been minor financial bumps in income, but inflation is consuming the extra money. From 2005-2015, pay increased by one per cent in the U.K., 30 per cent in Canada, 41 per cent in New Zealand and 45 per cent in Australia. Healthy sounding metrics, if the value of that money wasn't decaying so quickly.

When inflation adjusted, those numbers aren't so generous. Australians made 18 per cent over that period, New Zealanders 15 per cent, Canadians nine per cent, and U.K. households made -27.86 per cent. I'll save you from having to re-read that last part: households in the U.K. lost almost a third of their purchasing power. By now you're probably wondering how exactly people are paying for all of these houses?

Scaled Index of Home Prices


The above chart is a scaled index of home prices in Canada, Australia, New Zealand and the U.K. against prices in the U.S. It isn't nearly as flattering when you look at them inflation adjusted in a common currency.

Household debt

Since incomes aren't moving as fast as everything else, households have resorted to borrowing. This has quickly accumulating, resulting in rapidly rising household debt. While many people resort to this in a pinch, it shouldn't be the norm.

Unfortunately, since 1998 this HAS been the norm for households in these four countries. The steepest debt-to-income ratio belongs to Australians, where the average household ratio is 185 per cent. This means they have $1.85 of debt obligations for every dollar they earn.

Quickly catching up is Canada, with a ratio of 165 per cent, and New Zealand at 161 per cent. Last on the list is the U.K., where it's "only" 150 per cent, but they've been maintaining this the longest. U.K. households have had debt obligations exceeding their income since 1995. That's 21 years if you're trying to do the math.

Debt-to-income ratios


Debt-to-income ratios in Canada, Australia, New Zealand and the U.K.

Economic output

To make matters worse, household debts in these countries exceed the Gross Domestic Product (GDP). Simply put, the people (not governments) in these countries owe more than they produce. U.K. households have it the worst, with £2.788 trillion (US$3.62 trillion) of debt. They are projected to only produce £1.896 trillion (US$1.44 trillion) in GDP this year.

The other countries aren't quite as bad, but nowhere near good. Australians have $1.734 trillion (US$1,32 trillion) of debt, being met with AU$1.668 trillion (US$1.27 trillion) in GDP. New Zealanders are faring a little better with NZ$252 billion (US$182.78 billion) of debt, being met with NZ$250 billion (US$180 billion) in GDP. New to the club are Canadians with $1.973 trillion (US$1.5 trillion) of debt, being met with $1.896 trillion (US$1.44 trillion) in GDP. To tally things up, that's US$6.622 trillion of household debt, and only US$5.25 trillion in GDP.

You know how everyone is talking about the epic Chinese consumer bubble? The one that's going to pop and send the world into economic distress? Well that's US$4.5 trillion spread across 1.357 billion people. Sure that's steep, but that's spread over a lot of people.

The Commonwealth bubble we're looking at is US$6.622 trillion dollars, spread across only 126.5 million people. That's 16 times more debt for every man, woman and child in these four countries than those in China. It's also worth noting that China's $4.5 trillion is only roughly 40 per cent of their GDP. While it's a large number, they're still making a lot more than they're spending.

Now this doesn't mean these countries are going to fall into economic collapse soon. As long as people can continue to borrow more, and we can continue to import capital -- things will keep going.

Unfortunately, this can only go on for so long.

This post was originally published on Better Dwelling. Like our Facebook page for more Canadian real estate insights.

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