Skip to main content

Betting the House

Homeowners around the world effectively gamble on home prices. Their risks today are often big due to real estate bubbles in such glamour cities as London, Paris, Madrid, Rome, Istanbul, Moscow, Shanghai, Hangzhou, Sydney, Melbourne, Vancouver, Los Angeles, Las Vegas, Boston, New York, Washington, D.C., and Miami. Those bubbles may keep expanding, or may burst, leaving many homeowners mired in debt.

The risk to home prices in the aftermath of a bubble is real and substantial. In the last cycle of real estate busts, real (inflation-corrected) home prices fell 46% in London in 1988-95, 41% in Los Angeles in 1989-1997, 43% in Paris in 1991-98, 67% in Moscow in 1993-97, and 38% in Shanghai in 1995-1999. All of these drops were eventually reversed, and all of these markets have boomed recently. But this does not guarantee that future drops will have a similar outcome. On the contrary, the future real value of our homes is fundamentally uncertain.

Most homeowners are not gambling for pleasure. They are just buying real estate because they need it. But, because they do nothing to protect themselves against their real estate price risks, they are unwitting gamblers. In fact, home buyers in most countries do nothing to protect themselves – short of selling their homes – because there is nothing to be done. A market for real estate derivatives that can help balance these risks is only just beginning to appear.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

https://prosyn.org/kTaRVWe;
  1. sierakowski47_Carsten KoallGetty Images_kyczynskiangryshadow Carsten Koall/Getty Images

    The Survival of Democracy in Central and Eastern Europe

    Sławomir Sierakowski

    Following parliamentary elections in Poland and local elections in Hungary, populist autocrats in both countries remain in power, where they will continue to undermine democratic institutions. Even so, relative victories for opposition forces in both countries show that the region's "illiberal democrats" are not unbeatable.

    0
  2. tharoor133_Drew AngererGetty Images_modihandsout Drew Angerer/Getty Images

    India’s Modi Slowdown

    Shashi Tharoor

    After Prime Minister Narendra Modi was overwhelmingly re-elected in May with an even larger majority for his party, many economists expected him to take bold steps to remove the many bottlenecks that have discouraged investors. But no one should believe the Modi government has the ability or the will to fix what it broke.

    3
  3. drew47_Drew AngererGetty Images_trumpgiulianasmiling Drew Angerer/Getty Images

    Will Trump Be Removed from Office?

    Elizabeth Drew

    Assuming the US House of Representatives votes to impeach President Donald Trump, the fact remains that there are far fewer votes in the Senate than will be needed to convict him and remove him from office. But the willingness of Congress – including the Senate – to continue tolerating his dangerous conduct is now truly in question.

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated Cookie policy, Privacy policy and Terms & Conditions