Dear Reader,
So far we have established that there is a housing bubble, that this bubble is large and likely has been caused by systemic factors, and that the modern version of this market is Ponzi-scheme-like.
The logical follow up to this is to ask: Is this bubble going to burst?
The honest answer is: who knows? But it is likely that when it happens it will be a protracted and drawn-out process over years rather than the immediacy we have come to expect when dealing in financial markets. We have already seen this happen to a degree in Japan.
From 1970 to 1991, Japanese housing prices, as in the rest of the world, became increasingly separated from the underlying rental value, as the amount of household debt and credit grew. The financial crisis of 1991 kicked-off a slow household deleveraging in Japan and a steady decline in the house price index as the speculative mania abated and prices became more linked to their underlying productive capacity: rents.
Interestingly, we find that as …