Remember the 1997 property bubble? It's now in stocks

July 25, 2015 08:00
In the red-hot 1997 housing market, mortgage payment often exceeded household income at the height of the bubble. Photo: Wikipedia

Hong Kong people who suffered in the housing market crash of 1997 are familiar with the pain of so-called “negative equity”.

In the US, homebuyers with no income, no job and no assets know the feeling. They could easily obtain low-interest mortgage until they could no longer pay for it.

When the real estate bubble burst, many borrowers were unable to make payments on their subprime mortgages.

This scenario is playing out in mainland China where individual investors have taken out excessive margin financing, triggering a meltdown in A shares. 

The market has stabilized after authorities unveiled various intervention measures.

Bubble, debt and leverage are hot topics in the market right now. 

Three American scholars -- Oscar Jorda, Moritz Schularick and Alan Taylor -- have published research on bubbles bursting in stock markets over the past 140 years.

The study shows that a debt-driven housing market bubble is the most dangerous, followed by a credit-driven stock market bubble.

Their research also found that a burst stock market bubble not involving massive debt has the least economic shock.

Which is why the 1929 Wall Street crash triggered the Great Depression while the 2000 dotcom bust produced a short-lived recession.

The conclusion itself offers nothing new, but it’s interesting that the authors have quantified the economic damage of real estate and stock market bubbles.

They found the per capita GDP in the US was 8 percent lower than normal within five years of a housing market meltdown.

By contrast, per capita GDP was only 1 percent lower than normal within five years of a stock market bust.

If the stock market bubble involves huge financing, the difference could be up to 4 percent.

Real estate lending booms could be more horrifying.

Buying a home tops the wish list of most Hong Kong people.

The Centa-City Leading Index soared to 142.62 on July 12, 38.5 percent higher than the peak of 102.93 on October 19, 1997.

The index likely does not fully reflect the unaffordability of housing for the young generation.

People my age should have a good memory of the red-hot housing market in 1997.

Back then, mortgage payment often exceeded household income at the height of the bubble.

How could people survive? Most couples would do three or four part-time jobs to make ends meet.

Also, there were professional speculators.

The government has adopted tightening mortgage measures to force them out.

But the mortgage payment ratio is still far from the 1997 level. It's still higher than the sustainable level of about 35 percent.

This article appeared in the Hong Kong Economic Journal on July 24.

Translation by Julie Zhu

[Chinese version中文版]

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Columnist at the Hong Kong Economic Journal