In this interview with The Compound, Jeremy Grantham explains why the real estate market has created a global bubble, causing house prices to skyrocket. He believes in the long run, house prices are expected to decrease due to the unsustainable nature of the market. Here’s an excerpt from the interview:

Grantham: Underestimating the time that it takes for some of these things to work through, particularly real estate, and I’m sympathetic on that one because real estate is a global bubble.

It has driven house prices provably to multiples of family income all over the world. China, Beijing, Shanghai, you tell me 15 times, 20 times family income.

Sydney, Adelaide etc. Canada, the UK, London, they used to be multiples of three and a half times family income London is now ten. Toronto’s worse etc, etc.

No-one can afford to buy a house. No young kids coming out can buy a house. This is not a stable equilibrium.

Furthermore the mortgages have gone from three, which explains everything, to seven, which explains nothing.

And eventually the seven will start to explain quite a bit. But how long does it take? I mean just think the first reflex is I can’t move for God’s sake.

I can’t afford to go from three to seven so I am going to stay. Which means no houses are on the market. Which means for the handful of people who have to move they’re actually in a bidding war.

So real estate has never been about three month predictions, it works slowly but surely, in the end you pay more because you could afford to. In the end you will pay less because you can’t afford to.

House prices will come down and everywhere from Australia… mention that in Australia it’s world war three instantly, they are more optimistic than Americans, and they hate any idea that they’re real estate…

You can watch the entire discussion here:

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