2008: The Year The Bubble Burst

Source : The Business Times, December 16, 2008

(LONDON) Property prices collapsed worldwide in 2008 as hyper-inflated housing bubbles finally burst, brutally punctured by the global credit crunch - and the slump could continue for two more years, experts say.

The strains had begun appearing in mid-2007 when overstretched US homeowners began to default on loans known as 'sub-prime', a term virtually unknown outside the United States until 2008 when it became a byword for the financial crisis.

These 'bad' loans had been re-packaged by banks and sold on. The number of institutions which had invested in them only became clear this year, and they started a chain reaction which led to banks refusing to lend to each other.

When in September the US government seized control of the giant mortgage companies Fannie Mae and Freddie Mac - which between them account for half of the US home-loan market - the depth of the combined effects of the credit crunch and the housing slump came sharply into focus. 'The system has gone into a really brutal reversal,' said Philippe Waechter, director of economic research at Natixis Asset Management. 'The financing of property has become much more traditional and a lot more cautious.'

Both the commercial and residential property markets are essentially caught in a 'perfect storm'. Potential buyers have been deprived of credit by banks which have become far more cautious about lending. And buyers are holding off because they expect prices to fall even further, or shying away from major purchases while unemployment is rising.

Aaron Guy, real estate analyst at investment bank Collins Stewart in London, said: 'Before the credit markets dried up, 70-80 per cent of the purchase of each building was financed by credit and the remaining equity was in plentiful supply. So if you take a 10-storey building, you can take away seven and a half storeys of its debt financing and 2.5 storeys of equity is also more scarce and expensive. Among the banks I speak to there is very little desire to lend to commercial property and many won't lend at all. We expect this will continue as far as we can foresee into 2009 and it could be more than two years before the property market recovers.'

The biggest falls in house prices came in countries where banks lent the most, especially the US and Britain. A global study by British estate agents Knight Frank showed US house prices plunged by 20.6 per cent in the third quarter of 2008, compared with their peak last year. In Britain, they were down 10.3 per cent over the same period.

While the slide in prices has been fastest recently in Britain, Norway, Canada and Lithuania, the study shows that more than half of all the countries surveyed showed falls in the third quarter compared with the preceding three months.

Nicholas Barnes, head of international research at Knight Frank, said: 'It is now clear that no part of the world is likely to escape the credit crunch as property prices start to fall in more and more parts of the globe.' While eastern Europe is resisting the trend better than some parts of the world, prestige projects are biting the dust amid the crisis - work on the 600-metre Russia Tower in Moscow was halted in November.

Asia has not been spared either. In Hong Kong, the third-quarter fall was 2.5 per cent and in China, house prices fell 0.1 per cent, prompting the government to exempt property transactions from stamp tax and value-added tax to boost the ailing market.

In Spain, property developers have been falling like dominoes. One of the biggest, Metrovacesa, had boldly bought the London headquarters of British bank HSBC last year. But the ailing company was forced to sell the building back to the bank at a loss of 290 million euros (S$577.8 million).

So when will the gloom lift? Mr Waechter, of Natixis, says it will not be soon. 'I don't think the property market will improve before 2011 or 2012,' he said. The Organisation for Economic Co-operation and Development agrees. 'The ongoing adjustment in housing markets still has a long way to go,' said Jorgen Elmeskov, the director of policy studies in the economics department. -- AFP