Château de Versailles
By Jean-Christophe BENOIST

Let’s consider the Post-Deluvian index an established measurement instrument.

French-Spanish-USA-Swedish-Housing-chart
The Post-Deluvian measures housing price drops from the top – where the top = index 100. This leaves out realtors and politicians claims that their bailiwick is – Oh so special. A mental institution with another colour of wallpaper is still a loony bin!
The French home prices seem to have recovered from the 2008 knockdown. But in reality it is probably more of an indicator of the health state of the banking sector that is ultimately financing homes and of the economic health of the population in terms of ability to service debt.
Banks have a lot of methods to pretend health and avoid taking losses.
One of these methods is manipulating home prices, as drop in house prices will eliminate the security behind loans. With no – or inadequate – collateral behind a loan leaves the creditor to trust the ability and willingness of the debtor to service debt: Nothing is more unconvincing than a debtor in distress.
The US banks are in deep trouble – we all know that; but still there is adjustment of the price levels In the downward direction – that is banks ARE taking losses – which means they do have some ability to take losses: Either through earnings or through equity (God forbid).
We know that the Spanish banks are ruined – and ruined to an extent that the entire country is only kept from bankruptcy by the combined effort of the European Union. The economic measures taken by Spain are generally in economic terms an effort to determine the ability of the Spaniards to service debt. The exterior world is really indifferent to how debt is services – that is an internal Spanish power struggle.
The significance of Spain in this context is, that they have (very unwillingly) begun shaping up their economy – and Spain has more or less given up trying to prop up their insolvent bank. That is the good news.
France on the other hand has pretended their economy in a better shape than it really is – thus jacking up home prices. The problem is that with Q4 2011 it seem like that won’t work any longer. That is: France is in for a destructive meltdown. The pitiful 10% drop in prices in 2008-09 is an indication of the sorry state of the French banks – even the Spanish banks could absorb a 20% decrease in home prices before resorting to accounting devises.
But there is another more ominous patient in the emergency ward still pending. Sweden. They took a microscopic 5% before pulling out all the stops and they have massaged prices up 10% OVER the 2008-09 level. One factor is that in 1991 the Swedish banking sector was all but killed off – leading to a part nationalization and a reputation for not taking losses. Now: No bank takes losses if they and their accountant can avoid it; but Swedish banks are rumored to be downright pathological. Another factor is that the Swedish banks were forced to take very big losses in the Baltic countries – so there simply is no room for domestic losses.
The disturbing indication of the Q4 figures is that ALL countries (even Australia) seem to indicate that the banks cannot hold price up any more – and they seem to break down more or less simultaneously!
For the US it is noteworthy that she came from an index 40 and is now at an index 66. That is not to indicate that prices will stabilize after a further drop of 40% from today’s level – that is in all probability not going to happen; but it does give an indication of how hard the US banks will be hit the second time around. The sight will not be pretty – but compared to others it will be a Walt Disney version.

The other countries came from a level around index 30 and have taken between 0 and 20 percent – there is a long way down before hitting something hard before they tumble further again.
It is not the homeowners I’m worried about – however unpleasant the prospects may be, and they are ugly. You simply can’t evict – say a quarter – of the population AND expect to sell off their houses to anything approaching book value: To whom do you intend to sell? To the homeless? Right! They are evicted – and they envy the dude living in the cardboard box his creditworthiness!
No the problem is the banks – and the financial sector as such. I really can’t see them surviving in anything like the form they have at the present. Another problem is the pension funds: Where are they going to place their money – in Greek or Spanish sovereign bonds?
The only solution for the pension funds that I can see is in real estate rental – which might not be a bad thing – provided the prices are adjusted; but that is not going to happen in reasonable time.
Here I am with Professor Shiller: The capital and financial structure will change beyond recognition.