Prof. Robert Shiller of Yale University has always had international publicity and fame, but since winning the 2013 Noble Prize for Economics, he has definitely felt a quantum leap. The expert in real estate market and stock analysis, who created several leading economic indices and spotted bubbles in the past, told "Globes" in an interview at the World Economic Forum at Davos that the time is not yet ripe to leave the stock market, and to think carefully before buying an apartment in Israel.
"Globes": Last month, the US media said that there was a bubble on Wall Street. Should we quit the market?
Shiller: "I've always been careful to avoid the word 'bubble'. The media recently said that there was a 'bubble'. It's like using the word 'crazy'. I'm crazy about my wife, but that doesn’t mean that I'm really crazy. US stock markets are a bit overpriced, but they're not super expensive. Profit forecasts are still good, so there is no need to dump all the shares. I advise keeping part of a portfolio in shares, of course on the basis of the risk level that each person wants."
In your opinion, how strong is the US economy really and is it ready for the end of T-bill purchases by the Fed?
"We're still licking the wounds of the great crisis, and it will take us more time to recover. The administration's policy has improved, but on the other hand, if there is another recession, the US administration will be less able to respond to it because it has already accumulated a lot of debt. As for the Fed, stimulus plans are coming to an end. How much longer is it possible to buy assets? The recovery is slow, and it may take a lot more time. In addition, we have a great many baby boomers, many of whom lost their jobs during the crisis, and after they've been at home for six months unable to find a job, they simply decide to give up and stop looking. That is why unemployment fell."
Will the Fed's tapering of bond purchases have a dramatic effect on the markets?
"It will affect bond yields, but we don’t need the program in ordinary times, and if investors' confidence is strong enough, and I think it is, the end of the program will not have a dramatic effect."
US home prices are fair
Shiller is an international expert in analysis of real estate markets. In the US, he co-invented the Case-Shiller Home Price Index. Following the recovery in home prices over the past 18 months, the index indicates that prices are just 7% from their peak in the 2006 bubble, in nominal terms, but 30% below the peak in real terms.
"Prices are still low," says Shiller. "But their level is fair at the moment. If we examine the history of prices since World War II, we can see that, over time, in real terms, prices have not risen, but have been stable. We have therefore returned to the nominal area in terms of prices, and the rise over the past 18 months should come to an end. However, the futures market in Chicago expects a 6% rise in prices over the coming 12 months."
What would you tell an Israeli investor interested in buying a house for investment in the US?
"The momentum is weaker than it was. I think that prices may continue to rise over the next couple of years, but not by much. As an investor, you should think about the costs, such as home maintenance. How much will it cost to manage the whole thing from the other side of the ocean? Do you think prices will rise? Don’t expect much added value. There may be none at all. That is why I'd advise buying a home for investment here only if you can get really, really good rent."
Shiller has heard about the booming Israeli real estate market in recent years. He says, "I know that the Bank of Israel under Stanley Fischer tried to restrain it, but failed. I don’t know what Karnit Flug is doing, but maybe she should worry."
Why? "This might inflate to a bigger bubble and burst. That is not good."
You said that you don’t easily use the word 'bubble'.
"I'm a foreigner, but from what I hear, this sounds like a bubble."
Psychology of decision making
If you were to ask an ordinary economist whether there was a real estate bubble in Israel, he'd probably analyze the low interest rate, the housing supply, and other factors. Shiller says that during the Great Depression in US, interest rates were low and home prices did not rise, so there is no necessary connection between the two factors all the time. Instead, he proposes analyzing a factor that may be the hardest to quantify in economics - the psychology that drives people to make decisions. For him, this psychology is common to everyone, everywhere.
"I'm not an expert on Israel, but people behave the same everywhere," says Shiller. "I believe that home prices are not always anchored in economic reality. Keynes once said that so long as everyone believes that the price should be high, they'll pay. If people think that it pays to buy a home at a high price, they'll pay it. They won't think that it doesn’t pay.
"It's like talking about fashion. You can get a consensus from all the answers about who is the most beautiful woman in Israel. But it would be wrong to look at it this way, because we're talking about taste. After all, there are a lot of beautiful women in Israel. The same is true about real estate prices."
"I hear the same story in many countries. I was in Beijing, and someone told me that he did not know how people could afford to live there. Why does this happen? I think that it's related to the current stage of capitalism in history. The developing world is turning capitalist and there are billionaires emerging in India, China, and other countries. You hear about the amazing successes of people, and it seems possible for everyone. People look at high prices and say, 'It's simply a necessity of our time, it what should be and it will continue, and the best thing is to join the party. It's like swimming in a river with a strong current, you're swept away, but don’t imagine for a moment that the current will reverse."
That's dangerous thinking, no?
"I went through the same thing in Brazil (where home prices have risen 200% since 2008, drawing warnings of a bubble and fears that the mortgage market would grow to 20% of GDP in the coming years, if the trend continues - A.B.I.). I asked people why prices were rising so much and they thought they knew. They told me, 'Brazil is becoming a modern economy. It's developing a middle class, which demands housing, and there aren’t enough homes.' They said that they were developing a modern mortgage market. I think that there is also an element of patriotism that is affecting the real estate market."
What do you think? Go with the flow and buy a home even at a high price?
"I think that in the short term prices may continue to climb, but at some point it will turn around. It always ends the same way: prices become so high that people cannot afford them, at which point prices begin to fall and suddenly a lot of people decide to sell. When will this happen? Predicting bubbles is like predicting the success of a movie. I can show you the movie and ask you if it will be a hit. You'll have your opinion, but it won't be accurate. No one really knows."
Published by Globes [online], Israel business news - www.globes-online.com - on January 27, 2014
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