Housing bubbles: why are Americans ignoring reality?

Households should not spend any more than three times their gross annual household income to house themselves, and importantly, not load themselves up with any more than two and a half times their gross annual household income in mortgage debt.

It has not dawned on Dr Housing Bubble to date, that as the California bubble inflated, financial institutions simply had to increasingly lend outside these historic norms, if they wished to maintain market share.

Understandably, the financial institutions - in no doubt being acutely aware of the risks of this obviously risky high multiple lending - were very keen to securitise it and off load the risks to others.

The only mistake they made was not offloading the risks adequately or fast enough! Herb Greenberg outlines this financial circus in "Straight Talk on the Mortgage Mess from an Insider", MarketWatch.

It appears too that Professor Robert Shiller of Yale University is “terribly conflicted” about what is happening, if his recent extraordinary Fox Business television interview ("Shiller on Housing: ‘I am Terribly Conflicted’", Glick Report) is any guide.

Meanwhile, as the Americans are continuing to be confused and conflicted, in Australia and New Zealand there is now widespread recognition there must be structural changes put in place to ensure that these disastrous housing bubbles don’t get underway again (see Performance Urban Planning http://www.performanceurbanplanning.org/ for access to New Zealand Government statements. For recent Australian news and reports see “Bottlenecks choking recovery”, The Australian; “More houses, not taxes”, The Australian; “Home ownership dream fading, say Flinders University researchers”, AdelaideNow.

It needs to be recognised that at their core, these issues are not “ideological” or “environmental”, but have much more to do with deliberately misleading information being generated by professionals (refer my article earlier this year "Housing Bubbles and Market Sense") in collusion often with political and commercial elites, keen to promote housing bubbles for their own ends.

I discussed this at some length, with suggested solutions for discussion, within a paper I prepared last March "Getting performance urban planning in place".

Yet the Americans seem to persist in ignoring the real structural issues - and instead are choosing to “paper over the cracks” by financially bailing out everything in sight. An exercise in futility if ever there was one, as the Japanese have learnt to their cost following the collapse of their property bubble in 1989.

It is to be hoped that the Americans belatedly start getting the public conversation underway, in working together exploring real solutions to these unnecessary housing bubbles. We have done this in Australia and New Zealand these past five years and it is working.