“Are we there yet?” is the question on everybody’s lips. As in – are we at the bottom of the real estate downturn? If I could answer this question and be perfectly accurate, I would be a rich man. Having said that, I am going to try and answer it anyway.

The simple fact is that we are in a whole new ball park as far as this question goes. Never in the history of property crashes has there been such a concerted effort on the part of the governments, banks and newspapers to try and prevent a natural free market correction. This will of course have an effect on the way the downturn plays out. These are a few examples of the efforts being put out to prevent what I consider to be an inevitable correction:

• The European Central Bank has just printed or “quantatively eased” 60 billion Euros into the Spanish housing market by way of purchasing this much in Spanish covered bonds, and the Spanish property market is still tanking.
• After printing £225 billion in new money, the British government has just introduced a 95% mortgage through Lloyds TSB, which is largely government owned now. This new mortgage product called “Lend a Hand,” calls for a 5% deposit from the buyer and another 20% deposit to be placed in a special savings account by a friend or relative. This money will have a charge placed on it by the bank until such times as the buyer has built up enough equity in the home.
• The Dubai government was forced to borrow $10 billion from neighboring Abu Dhabi to shore up the ailing economy, which was almost solely based on real estate. Despite this, small developers and contractors are still going broke – having not been paid by the government-owned developers, and real estate values have fallen by 50-70% - depending who you ask.
• Foreclosures in the US are likely to reach higher levels once again this year, in spite of a number of government initiatives to prevent this, and the number of jumbo loans, Alt-A mortgages , and home equity loans likely to default over the next two years is almost incalculable. Many of these loans are insured through AIG et al, so we can expect more mayhem in the US markets.
• The Chinese government has pumped nearly $600 billion into her own economy, but there is an estimated 100 million square feet of empty office space in Beijing alone

These are just a few examples of the lengths being gone to by the governments, a;; of which seems to be intended to get you to put all your money in investment properties. Here are a few headlines from “news” sources recently about the real estate markets, suggesting either that there was not a problem in the first place or that the problem has now magically disappeared:

• “Equities surge as U.S. housing recovery hopes rise” MarketWatch (WSJ) May 18, 2009
• “Denver to lead housing recovery?” KDVR Fox31 May 20, 2009
• “First-time buyer deal breaks mortgage deadlock” The Times May 20, 2009
• “(Property) Prices Stable in Italy, study says” NY Times May 20,2009

And these are just a few random headlines from a quick Internet search over the last few days. I have been seeing and reading similar headlines for the last two years. Clearly it is in the newspaper’s interests to attempt to re-inflate the housing bubble that spawned so many other bubbles. They rely on advertising and that advertising is drying up fast.

The credit bubble blew up the housing bubble blew up the luxury goods bubble and numerous other bubbles. The other factor to take into consideration is the global nature of these bubbles. Many European manufacturers were relying on Chinese consumers to buy their “luxury goods.” Many Chinese manufacturers were relying on US consumers to buy their plastic crap. Many Eastern European housing markets were relying on buyers from outside their country. Many French, Spanish and Cypriot housing markets were relying on British buyers. Many South American housing markets were relying on U.S. buyers. And so on and so forth.

As Ludwig von Mises said, “There is no escape from a credit induced bubble,” and we are not escaping this one. I am no economist, but simple common sense dictates that it is not possible to get out of a problem caused by borrowing too much money by borrowing more money.

So – when will we reach bottom? I have said it before and I will say it again. We will have reached the bottom of the housing market when average property prices are equal to three times average salaries. Simple.