Real estate bubble this time it is (somewhat) different

Real estate markets are running hot. When the bubble bursts? Nordea Asset Management draws parallels to the subprime crisis.

History tends to repeat itself, which is due to a variety of mechanisms. Thus, central banks can tighten monetary policy too much, households can become too indebted, and capital can be allocated to the wrong sectors. At the same time, however, this opens up the possibility for investors to better manage their risks. Nordea Asset Management has summarized the lessons that can be learned from the subprime crisis in a market commentary.

After the U.S. recession in 2001, tax cuts and loose monetary policy supported growth and demand for Chinese goods, which was reinforced by an artificially weak renminbi. China and the BRIC countries (Brazil/Russia/India/China) rose by exporting deflation, while U.S. banks financed the purchase of increasingly expensive houses even for buyers with poor credit ratings. Banks simply bundled and resold these risky subprime mortgages on the market. Eventually, the real estate market collapsed and an enormous global credit crisis ensued. The question is whether the very expensive real estate market in China is now facing a similar turning point.

Is the house of cards collapsing?

The period after 2008 was characterized by a very loose monetary and, to a certain extent, fiscal policy worldwide, which in China led to a massive increase in investments in infrastructure and real estate. Financial assets rose, with the value of equities rising much faster than debt, reducing leverage. In the search for real assets, real estate, technology and eventually cryptocurrencies benefited tremendously. In China, for example, most of the wealth of private households is invested in the real estate market. With inflation now rocking the economy, the question is whether the house of cards will come tumbling down. As with the subprime crisis, various markets send out early warning signals.

This time it is (somewhat) different

China is unlikely to succeed in preventing the credit crunch, also because of the zero-covid strategy. In contrast, banks in Europe and the U.S. are far more tightly regulated than they used to be, and central banks are more concerned with financial stability, allowing them to influence the value of expensive assets by managing liquidity. The main focus could be on the very expensive real estate markets.

Stocks outside the U.S. are starting to look attractively valued to Nordea Aasset Management, while they are still far from fair value in the U.S. – apart from the tech sector, where many unicorns have already fallen sharply in value. At a time of continued economic and political instability, Nordea Asset Management recommends focusing on less risky companies that are cheap and offer a solid earnings path, such as Coca-Cola and Air Liquide.