Posted on 04/18/2006 10:40:10 AM PDT by ex-Texan
Do higher house prices make a country richer? The answer is simply “no”. If the market value of the stock is raised, those who own it are made better off by as much as those who will buy their houses from them are made worse off. Higher prices merely redistribute income among residents, principally from the young to the old.
So why do fast-growing economies tend to have soaring house prices and slow-growing ones the opposite? The answer is not that higher house prices make a country richer, but the opposite: the wealthier the country, the more expensive its housing.
Of the nine countries in the charts below, seven enjoyed relatively strong rises in real house prices over the past decade. But in two key cases – Germany and Japan – prices fell.
It is no surprise that the laggards have also been two of the worst performing high-income economies over this period, while Australia, France, Ireland, New Zealand, Spain, the UK and the US have shown better economic performance.
Why then should faster-growing economies experience strong rises in the price of housing?
Scarce land increases in value as economic activity rises. More important, richer people spend more on better located housing. Disproportionate increases in prices are needed to ration the slowly adjusting supply in response to higher demand. Planning restrictions may even halt the adjustment in supply.
Income is not the sole fundamental determinant of prices, however. Also important is the rise in the number of households. As people live longer, smaller households become more common and immigrants flood the labour market.
Improvements in supply of credit and reductions in nominal and real interest rates also raise demand: the former because they make it easier to borrow; the latter because they raise the prices of all real assets.
Declining economic instability can also justify more borrowing. The impact of lower real interest rates is ambiguous, however: in themselves, they raise asset prices, but to the extent that they suggest poor prospects for economic growth, they lower them.
Cyclical factors may also be at work. Real interest rates may prove unsustainably low: if so, a crash may follow soaring house prices.
A risk also exists of self-sustaining upward (and on the opposite side of the cycle, downward) spirals: higher house prices lead to more borrowing and spending, faster economic expansion, still higher house prices, and so forth. When prices fall, however, declining housing equity, shrinking borrowing and spending and widespread defaults may generate a contraction in economic activity and in house prices.
A big question therefore is whether house prices have overshot equilibrium levels. In its December 2005 Economic Outlook, the Organisation for Economic Co-operation and Development said prices were overvalued in Ireland, Spain and the UK, but not elsewhere. Yet British economists writing in the FT deny this of the latter (Gavin Cameron, John Muellbauer, Anthony Murphy, “Housing pessimists are wrong but have their uses”, March 27, 2006).
Where prices have risen far faster than underlying incomes, only two possibilities exist.
Either prices have moved to a higher equilibrium level, in which case future purchasers will have to save more and consume less. That would itself have significant economic implications. Or they have reached an unsustainable level, in which case they will fall in real terms. That would have far more significant economic implications.
The future will tell us which and where – possibly quite soon.
"Cyclical factors may also be at work. Real interest rates may prove unsustainably low: if so, a crash may follow soaring house prices . . .'
Fairly objective editorial on the housing bubble from a global standpoint. Want more information on the world wide housing bubble? In point of fact, U.S. housing prices have been pushed upwards by easy credit and speculator buying. Last year alone, over 40% of home purchases were 'second homes' or homes purchased for 'investment' by speculators. In the past four years about 45% of home purchases were financed by interest only loans or ARM loans. Helpful charts and graphs. Americans have been using the home like ATM machines, withdrawing 'equity' to buy new automobiles and other luxury items. The proof is in the pudding. In March, 2006, new home prices in the western states fell about 15%. The next five months will make everything very clear. Yada, yada, yada.
There is no bubble, nothing to see here. Move on.
The Real Estate market is not in a tailspin, but rather a market correction to sensible price appreciation and financing. Speculators will hunt somewhere else and those who've tapped their home equity will either continue to pay the higher interest rates or pay them down.
Why is that some people wait with baited breath for a housing bubble burst? Do they like to see others experience financial difficulties/ruin just to be able to say "I was right! See, I predicted it would happen."? Hey, I can do that. I predict everyone of us is going to die...someday.
Another confused reporter.
The reason the housing market took off was the drop in interest rates, raising the value of all durable goods.
It now takes a smaller percentage of our incomes to buy the same house.
We are wealthier.
See Econ 101.
So, I guess if homes do not add to the wealth of a country, then we would be in the same economic position if we bulldozed every domicile and lived in tents. Yup, I believe that.
And since movies don't really change the survivability of a nation, might as well write off Hollywood too (not that that would be a bad thing).
I am glad there are geniuses to edumacate stoopid me.
Supply and demand ... who'da thunk?
You know you have a problem when the majority of the loans being sold are arm and neg arm loans.
Neg Arm = A loan where your debt actually INCREASES as you continue to pay the loan? Ugggghhhh......
So, I guess if homes do not add to the wealth of a country, then we would be in the same economic position if we bulldozed every domicile and lived in tents. Yup, I believe that.
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I truly hope that you are smarter than the two sentences above would indicate. And yes, I did recognize the sarcasm.
Because I don't own a house yet and I don't want to buy one and have its value decline by 25% within the first year.
The article is talking about the price of existing homes, not the construction of new ones. Just a little too fast today, Coyote.
Rather selfish of you. It's okay for others to suffer financially so you can purchase a house. Makes sense.
Seriously though, like many other posters, I don't have much sympathy for those who took out interest-only loans or other "easy" loans to get a house they really couldn't afford. It generally is not a good financial decision to follow that course.
But for those of us who purchased a house using more sensible methods of financing, I detest the opinions and wishes of those who, because (it appears to me) they think someone has too much house or too much money, would like to see a housing crash so that those greedy SOBs will get their just reward. It just doesn't make sense to me.
By the way, when is the perfect time to buy a house? If there is a housing crash and you make a purchase, what's to say your house doesn't depreciate another 25% after that?
"Seriously though, like many other posters, I don't have much sympathy for those who took out interest-only loans or other "easy" loans to get a house they really couldn't afford. It generally is not a good financial decision to follow that course."
The facts are different than the popular opinion.
For the last 20 years, people willing to TAKE the risk with variables have had LOWER house payments, than fixed rates.
So why have a variable loan?
1. Lower payments.
2. Annual payment increase limited and predictable.
3. Lifetime cap.
4. Not staying in property beyond a few years.
5. Willing to take risk, for benefit.
Why have fixed rate?
1. No uncertainty.
2. Unwilling to take risk.
3. Willing to make HIGHER payments, to avoid risk.
"Scarce land increases in value as economic activity rises. More important, richer people spend more on better located housing. Disproportionate increases in prices are needed to ration the slowly adjusting supply in response to higher demand. Planning restrictions may even halt the adjustment in supply. "
DING DING DING DING DING!
I have an ARM and I'm paying off the loan principal. And I bought my house 1 month after Sept. 11th! Gosh, I feel dangerous!
I agree with you. The average number of 3/2 houses for rent in my area was 9 in 2002. The average number today is over 30. Investment driven real estate gains are now being replaced by pressure due to increased interest rates. Markets are cyclic in nature with corrections being the norm. We would all be rich if we could just predict and act upon the next market cycle.
"Do higher house prices make a country richer? The answer is simply 'no." If the market value of the stock is raised, those who own it are made better off as much as those who will buy their houses from them are made worse off."
The Financial Times is usually a solid source for economics reporting, but the lead paragraph is misleading in hiding its implicit assumptions, among them (1) a closed economy and (2) zero population growth. Even under these unrealistic assumptions, the younger generation inherits the appreciated housing capital from the older generation so, as a whole, it cannot be made worse off by such appreciation.
There is definately a large side-effect to rising prices.
Local and state coffers swell with the much higher property taxes.
While I am at it:
Why do property taxes apply to the entire price of the house, which includes the COMMISSIONS paid to the RE agents?
That money is considered income to the agents, and income tax is paid on it. As time goes on, the property continues to be paid on the purchase price, which includes this agent income.
Isn't this double taxation???? Sure seems so to me and has for years.
Next time I sell or buy a house, I will make a separate side deal to pay the commissions, and leave them OUT of the recorded purchase price.
Those commissions and the property taxes collected on such is a great part of the "bubble" , IMO.
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