Easy money for the economy has unintentionally created a 'boom in the gloom' by pushing up house prices, Morgan Stanley says

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Easy money for the economy has unintentionally created a 'boom in the gloom' by pushing up house prices, Morgan Stanley says
Cheap mortgages are prompting investors to buy homes as a substitute to stocks and bonds, Sharma said.Blake Nissen for The Boston Globe via Getty Images
  • The stream of stimulus to prop up economic growth this year has unintentionally led to a sharp rise in house prices worldwide, Morgan Stanley's Ruchir Sharma wrote in a New York Times opinion piece.
  • Surging home prices have been led by increases in value of other assets like stocks and bonds, which has pushed investors to evaluate their options.
  • Mortgage lending rates have fallen to record lows as central banks flooded money into credit markets. That induced investors to cash in on cheaper loans, driving up home demand, the strategist pointed out.
  • "The risk going forward is that the boom will leave more people unable to afford a home and that prices will eventually reach dangerous bubble levels," he said.

Easy money flowing within the US economy has unintentionally created a "boom in the gloom" as housing prices have risen sharply this year, according to Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management.

Prices have also shot up for stocks and bonds, not just housing.

"This is a global market boom in the price of…everything," Sharma wrote in a New York Times op-ed on Saturday.

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Trillions of dollars in stimulus meant to revive the economy has instead poured into financial markets. Because of the massive flow of money, lending rates on 30-year mortgages have fallen to record lows. The rate stands at under 3% in the US, and below 2% in Europe.

Cheap mortgages are prompting investors to buy homes as a substitute to stocks and bonds, Sharma said.

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Sharma said home prices are now unaffordable for people in 400 out of 484 US cities tracked by crowd-sourced database Numbeo. New York is the most expensive city of all, where median home prices are over 10 times the median annual income.

House prices often slump during recessions, but this year they've actually jumped 4% worldwide even before the credit boom took off.

"This surreal 'boom in the gloom' is a government creation," Sharma said.

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"The risk going forward is that the boom will leave more people unable to afford a home and that prices will eventually reach dangerous bubble levels. And when booms go bust, it takes time to unravel the bad debts, which ripple through the middle class, lengthening and deepening the resulting recession."

The financial crisis of 2008 and 2009 had soured home loans at its epicenter.

Central banks should seriously consider tighter regulation and targeting asset price inflation concerns. Regulators will have to turn off the easy money tap before the "everything boom" swells into a full-blown bubble, Sharma said.

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