This analysis has been creating quite a stir in the past year and was featured in the popular ZeroHedge blog, Business Insider, and in the Keiser Report (starts at 1:40):
Could Sweden or Finland be the scene of the next European financial crisis? It is actually far likelier than most people realize. While the world has been laser-focused on the woes of the heavily-indebted PIIGS nations for the last couple of years, property markets in Northern and Western European countries have been bubbling up to dizzying new heights in a repeat performance of the very property bubbles that caused the global financial crisis in the first place. Nordic and Western European countries such as Norway and Switzerland have attracted strong investment inflows due to their perceived economic safe-haven statuses, serving to further inflate these countries’ preexisting property bubbles that had expanded from the mid-1990s until 2008. With their overheated economies and ballooning property bubbles, today’s safe-haven European countries may very well be tomorrow’s Greeces and Italys.
I’ve named this massive multi-country housing bubble “The Post-2009 Northern and Western European Housing Bubble.”
(The Post-2009 Northern and Western European Housing Bubble is a part of the overall Post-2009 Global Housing Bubble or “Housing Bubble 2.0” that I’ve identified. )
UK housing prices have nearly quadrupled from the mid-1990s to 2008, briefly fell 20% in 2009 and have since rebounded enough to keep property prices firmly in the stratosphere. UK property prices are very overvalued, currently valued at 128% of their historic price-to-income ratio and 140% of their historic price-to-rent ratio.  In a pattern similar to France, the UK housing bubble (since 2008) has been primarily driven by price gains in the capital city of London. Prime London housing prices rose a hearty 11.4% in the 12 months to October 2011 , up 40% from their post-credit crunch low , while most other investment markets fell in a very volatile year.
Like Paris, the city of London has such a strong level of international “brand recognition” and a perceived safe-haven status that wealthy foreign investors are clamoring to buy property in prime areas such as central London. “London property is the ‘Swiss bank account’ of the 21st century,” says Robin Hardy, an analyst at London investment firm Peel Hunt. Rich people in places like Egypt, Syria and southern Europe are rushing to get their money away from the turmoil, and for want of a better alternative, they are plunking it down in the “millionaire’s playground” of central London.  The nouveau riche of China, India and other emerging markets are also keen on diversifying their wealth into prime Western property markets such as London, Vancouver and Manhattan, while one hedge-fund manager said that London property was a “laundromat for Russian money.” An entire generation is locked out of the city’s broken and outrageously-bubbled housing markets as the average Londoner would need to triple their salary to £87,000 to buy an average price property.  The prime London property bubble is highly vulnerable to the popping of the precariously-teetering China and emerging markets bubbles as well as job losses and decreasing bonuses for City of London financial workers. 
After zooming 120% from 2000 to 2008 and briefly dipping 5.6% in 2009, French property prices have continued their inexorable march higher since late 2009. French property prices are highly overvalued, currently valued at 135% of their historic price-to-income ratio and 150% of their historic price-to-rent ratio.  Though property prices are strongly rising throughout France, the French housing bubble is largely driven by the Paris region, where prices have jumped 18% in 2010 and approximately 10% in 2011, up more than 40% since 2005. Some posh districts in Paris have risen at a 27% rate in 2011.  France’s housing bubble was goosed by a 2009 law that was meant to stimulate the housing market by creating a significant tax incentive for buyers. Mortgage rates that plunged from 6.5% in late 2008 to 3.5% in 2011 were another major catalyst for soaring property prices, causing fixed-rate mortgage lending to increase by 73% by early 2011. 
The French property market now has the dubious distinction of being the most overvalued in Europe and the third most overvalued market in the world, behind only Hong Kong and Australia , which have property bubbles of their own. The Paris-based OECD warned that “there is a risk that a prolonged period of easy finance could result in a price bubble,” which may endanger French banks , while Hervé Boulhol, the OECD’s France economist, warned against treating French real estate as a safe-haven and that the property market’s powerful rise without a corresponding rise in income “may signal a bubble phenomenon, as a bubble is a disconnection with fundamentals.”  Moody’s also issued a warning that the French property market was overheating and that the least cautious lenders could face steep losses in a more price severe drop.  By October 2012, the French property boom showed signs of an abrupt slowdown, with new mortgage loans dropping 45.8% (yoy) and a 30 to 40% decrease in home sales in Paris and Ile-de-France. 
While Germany was fortunate and sensible enough to have avoided engaging in the 2000s housing bubble folly with the rest of the world, Germans certainly seem eager to make up for lost time. The European Central Bank’s ultra-low key interest rate, while appropriate for the ailing PIIGS nations, is too low for faster-growing Germany resulting in negative real interest rates and fears of inflation. As is common in countries with negative real interest rates, German investors are pulling money out of low-yielding bank accounts and investments and plowing it into all types of real estate, causing prices to boom for the first time in a very long while. Property prices in Munich and Hamburg rose by more than 10% in 2011  , while obscure fields and forests in northeastern Germany’s Uckermark region have soared by as much as 20 to 30 percent.  In September 2012, George Soros said “You have a serious danger of a housing bubble developing in Berlin. It has a lot to do with the flight of capital and negative real interest rates.”  It is too early to determine if Germany is in the midst of a property bubble, but it is certainly a situation that warrants monitoring, especially if there is a temporary improvement in global economic growth and sentiment.
Global and EU economic turmoil have heightened Switzerland’s traditional economic safe-haven appeal, particularly due to the fact that Switzerland is not a part of the EU and has its own currency, the Swiss Franc. After suffering from a 1980s property bubble, Swiss property prices rose an average 42% since the year 2000, with prices doubling in some spots, for reasons similar to those of concurrent European housing booms. The median price for a house across Switzerland is now a California circa 2005-esque $850,000, $2.1 million in Zurich and an astronomical $2.55 million in Geneva.  Switzerland’s central bank (the Swiss National Bank), in an effort to stem the rapid EU-crisis induced rise in the Swiss Franc, cut interest rates to 0% and instituted a currency ceiling in the summer of 2011, creating alarmingly similar monetary conditions to those that caused Switzerland’s 1980s property bubble. 
In response to rising Swiss real estate prices, UBS launched a Swiss real estate bubble index, which surpassed a two-decade high in the 3rd quarter, officially placing Swiss property in the index’s “risk zone.”  Swiss National Bank Chairman Philipp Hildebrand warned that, “A rise in real-estate prices is among the greatest threats to Switzerland’s economy.”  Most worrisome is the warning of Janwillem Acket, chief economist for Julius Baer Group Ltd. (BAER), who claims that Switzerland could experience its own version of the subprime borrowing crisis, saying, “People who shouldn’t be borrowing are now seriously considering entering the housing market.” 
Belgium, which is the sixth-largest economy in the euro area and has not had a government in almost two years, has seen its property prices roughly double since the year 2000, barely pausing during the financial crisis in 2009. When property prices hit an all-time high in 2011, The Economist magazine included the Belgian housing market in a list of housing markets that were overvalued by 25% or more according to price-to-income and price-to-rent ratios and described the market as “more overvalued than it was in America at the peak of its bubble.” 
While Dutch housing prices have moderately deflated since 2008 after doubling since the late 1990s, they are still firmly in bubble-territory, according to a report by The Economist magazine. The Netherlands’ property market ranks among the most overvalued property markets in the world, overvalued by over 25% according to price-to-income ratio and price-to-rent ratios, common property-market valuation measures.  Like many countries in recent decades, the Netherlands engaged in a mortgage-borrowing binge that sent property prices soaring, saddling Dutch households with a level of household debt that exceeds 240% of disposable income, the highest level in the euro zone by far. 
The tiny country of Luxembourg has not been immune to the European property bubble epidemic as already lofty property prices have risen 11% since 2009 as mortgage rates fell 2.4% in Q2 2009, in line with ECB key rate cuts, from 4.5% in Q4 2008 . By late 2011, year over year rent prices for houses have exploded by nearly 18% and 8.35% for apartments , causing people to flee Luxembourg city in pursuit of cheaper housing. Luxembourg’s soaring cost of housing has caused its residents to sink deeply into debt, with the average household’s level of indebtedness up an incredible 172% since the year 2000. 
Austria’s housing prices are up a stout 70% since 2005, a rise completely unabated by the global financial crisis. Negative real interest rates and a relatively-low unemployment rate of 4.9% have encouraged Austrians to close low-yielding checking accounts and park their life savings in local property for rental income and capital gains.  Austria’s obvious property bubble poses serious risks to the country’s banks, which are already teetering on the brink after losing billions of euros in an Eastern European mortgage-lending scheme that has gone terribly awry since 2008. 
Although Danish housing prices have leveled-off after doubling from the late 1990s to 2008, prices are still thoroughly in nosebleed territory and are among the most overvalued in the entire world. Jes Asmussen, chief economist at Svenska Handelsbanken AB, claims that Denmark’s housing market may still be as much as 25 percent overvalued.  Denmark’s overleveraged banking system, with banking assets as a percentage of GDP at 454% versus the U.S.’s 90%, will experience unimaginable pain when the country’s housing bubble deflates in earnest. For all of the worry that Greece’s $462 billion sovereign debt has caused the world, Denmark’s ticking-time-bomb mortgage market alone is worth more than $500 billion, with nearly 70% of new mortgages being of the highly-risky adjustable rate variety (ARMs). 
In a pattern similar to other Nordic property markets, Swedish property prices have nearly tripled since the mid-1990s and shrugged off the Great Recession woes to rise to incredible new heights. Swedish property prices are overvalued, currently valued at 120% of their historic price-to-income ratio and 140% of their historic price-to-rent ratio.  The most recent phase of Sweden’s housing bubble is fueled by mortgage interest rates that have fallen from 6% in August 2008 to a just above 3%, with adjustable rate mortgages falling to under 2%.  Tommy Waidelich, the Social Democrats’ economy spokesman, warned that Sweden may have a housing bubble and that “A drop in house prices would hit growth, employment and state finances” and also saying, “If the reason that the price is high today is only because investors believe that the selling price will be high tomorrow – when ”fundamental” factors do not seem to justify such a price – then a bubble exists.” 
The IMF has also warned of a possible Swedish housing bubble, saying “There is significant risk of a decline in house prices in coming years, even in a relatively benign economic scenario,”  while the OECD warned that Swedish housing prices are overvalued by about 30 percent in relation to income.  Robert Shiller, the economist who successfully predicted the popping of the Dot-com and U.S. housing bubbles, warned investors against treating Sweden and Norway’s markets as safe-havens as the Nordic region is caught up in asset bubbles that will end with plunging asset prices.  A Danish finance minister has even warned Sweden of the risks of its housing bubble, saying, “Do not make the same mistake as we did in Denmark,”  referring to the Danish property bubble that has been deflating since 2008.
Norwegian property prices have quadrupled since the mid-1990s, and are up by nearly 30% since the Great Recession as the oil-rich nation rode the coattails of the commodities bubble and has benefited from the same “flight to safety” capital flows that have benefited (and inflated bubbles in) other Nordic countries. Norwegian property prices are highly overvalued, currently valued at 125% of their historic price-to-income ratio and an incredible 170% of their historic price-to-rent ratio.  Norway’s Prime Minister Jens Stoltenberg admitted that he was “afraid” that the Norwegian property bubble might burst , while renowned U.S. bubble skeptic Robert Shiller said of Norwegian property prices, “This really does look like a bubble.”  and that policy makers “should start worrying now because when the home prices get so high there’s a problem.” The euro area’s crisis has sparked “flight to safety” capital flows into Norway’s highly-desirable investment assets, pushing the Krone currency to undesirable export-harming heights and forcing the country’s central bank to cut interest rates to stem the inflow. Norway’s ballooning housing bubble is a side-effect of the nation’s excessively low interest rates relative to economic growth and inflation rates.
In February 2012, the IMF cut Norway’s growth forecast, saying that the Norwegian housing bubble is the country’s biggest economic risk and threatens everything from banks to economic growth.  In June 2012, the U.S. Federal Reserve warned that Norway’s property market was experiencing a bubble.  Norway’s booming housing markets and cheap interest rates are encouraging households to engage in a typical bubble-style debt binge as private debt burdens are estimated to grow to about 204 percent of disposable incomes in 2012.  A major risk to Norway’s economy (and possible bubble-popping catalyst) that virtually no mainstream commentators have acknowledged is the very real possibility that oil prices might drop and sharply reduce the country’s oil profits and thus economic growth.
Finnish property prices soared a dizzying 250% from the mid-1990s to 2008 , dipped slightly in the 2009 recession and bolted 20% higher as Finland and other Nordic countries recovered from the recession faster than their European neighbors to the south. The Finnish property bubble is being fueled by a mortgage market in which a jaw-dropping 90% of loans are of the highly dangerous adjustable rate variety, while banks are taking a page straight out of the U.S. housing bubble as they push reverse mortgages on their elderly customers. A Finnish bank advertisement for reverse mortgages even shows a cartoon person taking a vacation paid for with cash withdrawn from an ATM that is attached to their house! [See cartoon] It is as if nobody has learned a thing from the U.S. housing bubble – the saying, “those who don’t learn from history are doomed to repeat it” could not apply to a better scenario than the Finnish housing bubble.
While other Northern and Western European countries have seen their housing bubbles inflate since 2009 due to “safe haven” investment inflows, Iceland’s Housing Bubble is unique because it has inflated (or reinflated) primarily due to currency controls that were enacted after its epic financial collapse in 2008.
Though Iceland is said to be recovering very well from its financial crisis, there is an inflating housing bubble that is lurking behind the scenes that is helping to lend much-needed strength to the country’s banking system and consumer spending. Iceland’s housing prices rose an incredible 150% from 2001 to 2008 and gently eased 12% during the worst phase of the country’s crisis. A major reason why Iceland’s economy has faired far better than other hard-hit nations is that its property prices have not fallen much, unlike Spain and Ireland, whose property prices have dropped by nearly 30% and 50%, respectively.
In clear defiance of the lessons taught by the Global Financial Crisis, the price of new homes in Iceland have hit a record in the first quarter of 2012, having surged 40.1 percent since the final three months of 2010, according to estimates by the National Registry of Iceland in Reykjavik. Average house prices have risen 11.3 percent since the market bottomed at the end of 2009, according to central bank data at the end of the first quarter. (3) Iceland’s housing prices are rising in tandem with the overall Nordic Housing Bubble and are exacerbated by currency controls that are designed to prevent capital from flowing out of the country until 2015. Nearly 8 billion kronur ($1.13 billion as of June 28, 2012) is held within Iceland by foreign investors, unable to leave the country, and is flowing (along with domestic capital) straight into Iceland’s property markets. According to Asgeir Jonsson, an economist at Reykjavik-based asset manager Gamma, “If the development continues without interference, this will lead to a property bubble within the next two years” and “There’s a greater risk of an asset bubble being created in an economy that is closed off behind capital controls.” (3) Iceland’s housing market is quite overvalued, with an average apartment selling for 6.36 times the country’s average income, according to Statistics Iceland. Finnur Eiriksson, a computer scientist living in Reykjavik, said, “The exorbitant prices in the housing market, so early after the collapse of the Icelandic economy, are quite shocking.” (3)
Surging housing prices are helping to drive Iceland’s consumer spending higher, which was identified by a team of economists at Arion Bank as the main reason for the country’s economic recovery. (3) Iceland’s economy is slated to grow by 2.6% in 2012, which is even faster than Sweden’s economic growth rate. Car sales doubled in the first quarter of 2012 as Iceland’s consumers rekindled their love affair with shopping again. Jon Olafsson, who owns a car dealership in Reykjavik, expects to sell almost 1,000 cars this year, having sold less than 100 cars in 2009. (4) Of course, in this day and age, surging consumer spending and household debt levels go hand-in-hand and Iceland doesn’t disappoint in this regard as household debt grew to 270% of disposable income in 2010, up from 217% in 2007 and about 50% in the 1980s. (3)
It is simply mind-boggling that the world is back to blowing massive property bubbles so soon after the U.S. and peripheral European housing bubbles popped and caused such incredible economic carnage. The Post-2009 Northern and Western European housing bubble is proof that we are living in the era of The Bubble Bubble (a bubble of bubbles) as well as an era characterized by the most outrageous arrogance and hubris that humanity has ever experienced. The 2008 global financial crisis should have taught everyone their lesson once and for all, but we are clearly living in a world filled with excruciatingly slow-learners. More punishment is coming our way and will keep coming until we finally learn from our mistakes. Sadly, by the time we learn from our mistakes, it will likely be too late.
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