The Real Estate Bubble, MS2003

8/7/2019 The Real Estate Bubble, MS2003

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The Real Estate inflation bubble

Analyzed based on the data collected from the Toronto Real

Estate inflationary bubble that peaked in 1989


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The Toronto bubble in 1990, a year after deflation began in April 89.

Toronto median home price


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This is what I believed, back in 1990, the Toronto market should have done, if the

bubble had never existed



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This is how I believed the market would deflate back to normal



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This is what happened in reality, as I found out 16 years later



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The US single family home bubble as seen in a 7 year context only.

It looks as just a minor deviation !

US median home price


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The same bubble in a 40 year context


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The St Lucie county single home historical prices.The data is shown month by month, dividing the total dollars of all transactions by their total square footage.

(St. Lucie Property Appraiser database)

St Lucie county average home price in $/SF

Inflation bubble


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A close-up of the same bubbleAn offset of 9 months can be observed between the peaks of the investment and price bubbles.

The investment bubble peaked in July 2005 and the price bubble peaked in March 2006


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Where I predicted the St. Lucie single family market would stop falling.



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What will the market do after that?The scenario shown below assumes 2 years of stock depletion with a price growth equal to about 2%/year,

followed by a 7% price growth driven by inflation due to scarcity and to bailout excess liquidity.



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The construction cost behavior in the two Toronto BubblesConstruction costs kept growing for 2 years after the bubble began deflating

Then costs kept growing but at a slower pace while construction was at a virtual standstill.

Costs rode the second bubble catching up with all ground lost since 1992

The first bubble starts inflating in 1985


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US historical construction costs in $/SFThe construction cost inflationary bubble created a structural problem that needs to be resolved for the

industry to recover a normal pace.

Construction cost inflation accompanied Real Estate inflation


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Construction prices must substantially lower its current level to about 66% of what they are now (which seems close to

impossible), or otherwise wait 5 to 6 years, until general inflation and housing demand catch up with them. The best case

scenario seems to be 4 to 5 years of extremely low levels of new construction, until the market begins to normalize.

I recently completed a pricing exercise for a low income home in the St. Lucie area, starting from raw land and using local

contractor prices. At the current local construction costs, I would have to sell it for about $160,000, while a similar house is

currently selling for about $95,000.

For the equation to be balanced again, the $95,000 home would have to increase its price at a 6% annual rate for 6 years while

construction costs would have to increase its current level at no more than 1% per year. After 6 years, I could compete with the

existing house again and construction in general would regain life.

What does the future hold for the construction

industry?

Documents

The Real Estate Bubble, MS2003