[OPE-L] Boom in house prices tapering off

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Sat Jul 08 2006 - 09:00:51 EDT

(While some doomsayer leftists have been prophesying a catastrophic collapse
of the housing boom, in reality the buoyant housing market has been a prime
stabilising ("equilibrium") factor in most industrial capitalist economies -

Bloomberg, Wednesday July 5, 2006 (...) Markets for dwellings in the US,
France, Spain, New Zealand and parts of China are coming off the boil as
home-price inflation slows in response to higher interest rates. So far, the
rise in borrowing costs has been modest, giving builders and buyers time to
adjust. (...)

Housing prices in industrial countries have doubled in real terms in a
decade, the Organisation for Economic Co-operation and Development
estimates, raising the prospect of a quick reversal. If prices ease rather
than collapse, the world economic expansion may be able to continue without
sustaining too much damage. "The global economy should remain buoyant," says
Nariman Behravesh, chief economist of Lexington, Massachusetts-based
consultant Global Insight. He sees world growth slowing to 3.3 per cent next
year from 3.8 per cent in 2006 as housing cools. (...)

The boom has been concentrated in countries with big trade deficits: in the
US, consumers have used the equity in their homes to finance a spending
spree that included imported consumer goods. As the boom ebbs and consumers
pull back, trade deficits will shrink again. In the first quarter, the
average global house price was 6.1 per cent higher than a year earlier,
according to an index compiled by international real-estate adviser Knight
Frank [http://www.knightfrank.com/ResearchReportDirPhase2/10887.pdf]. That's
down from a 9.3 per cent year-on-year increase in the first quarter of 2005
and a peak of 10.9 per cent in the third quarter of 2004. (...)

US home prices were 12.5 per cent higher in 2006's first quarter than they
were a year earlier, according to the Government's Office of Federal Housing
Enterprise Oversight [http://www.ofheo.gov/]. That was down from 13.3 per
cent in last year's fourth quarter, and is the slowest rate of appreciation
in more than a year. (...) Some of the hottest housing markets in Europe are
also slowing down. Annual house-price appreciation in Spain declined to 12
per cent in the first quarter from 15.7 per cent in the first three months
of 2005. In France, prices for existing homes rose at a year-on-year rate of
14.2 per cent in the fourth quarter, down from 15.7 per cent in the first
quarter of last year. (...)

The likelihood of a gradual correction of the global housing boom is
buttressed by the experiences of Australia and Britain. After rising at 20
per cent annual rates early in the decade, housing prices in both countries
levelled as interest rates climbed. Both economies slowed; neither suffered
a recession. And now, both are seeing the market pick up.

Complete story:
"The Economist" magazine commented in December last year:

An overwhelming majority of experts are still predicting a soft landing with
no drop in prices. But property in many countries is so overvalued that even
if prices do not fall, they could stagnate for up to a decade. (...)

A recent report on the rich world's housing markets by the OECD concludes
that Australia has the most over-valued housing market, with prices 52%
above their "correct" level. Next in line is Britain, where prices are 33%
overvalued. To judge the fair value of homes, the OECD uses the ratio of
prices to rents, which is a sort of price-earnings ratio for housing. If
prices are too high relative to rents, [so the theory goes] potential buyers
will rent not buy, eventually pushing down real prices. In Australia this
ratio is 70% above its average level over the period since 1970. However, a
higher ratio of house prices to rents may be justified by low interest
rates, which make it cheaper to buy a home. The OECD tries to calculate the
"user cost" of home ownership, which in addition to interest rates takes
account of tax relief, property taxes, maintenance costs and expected
inflation. It then compares the actual ratio of prices to rents with a
"fundamental" ratio based on user cost. It is by this gauge that the OECD
finds Australian property to be 52% too dear. It concludes that only
Britain, the Netherlands and Ireland also have significantly overvalued
housing (ie, by 15% or more). Spain is modestly overvalued, but America,
France, Sweden and New Zealand look reasonably close to fair value. Homes in
Germany and Japan are undervalued by more than 20%.

So is The Economist wrong to talk about a global housing bubble? One problem
with the otherwise excellent OECD study is that its numbers are out of date.
It is based on the average for 2004, since when several markets have surged.
Using our house-price indicators, we have updated the figures for the third
quarter of 2005. For instance, American prices are now 15% higher than the
average for last year while rents have risen by 3%, so the ratio of house
prices to rents has risen by 12%. Using the OECD's method, this suggests
that housing is now 14% overvalued. If we also adjust for the rise in the
mortgage rate since 2004, the American market is almost 20% overvalued.
From: http://www.economist.com/finance/displaystory.cfm?story_id=5283797

Some comparative international stats: percentage of total dwellings which
are owner-occupied, rounded estimates by country, circa 2001 (ranked from
low to high)

Washington DC 39.9%
Germany  43%
Netherlands  53%
South Korea 53%
Austria  54%
Hong Kong 56%
Colombia 59%
Sweden  60%
Japan 60%
Papua New Guinea 60%
France  63%
EU average  63% (including rent-free households, 74%)
Portugal  65%
Denmark  65%
Canada 66%
Malaysia 67%
New Zealand 68%
Peru 68%
Northern Ireland 68%
Finland  68%
USA 69%
United Kingdom  71%
Australia 71%
Luxembourg  71%
Belgium  73%
China 73%
Italy  75%
Mexico 80%
Russia 81%
Ireland  82%
Phillipines 83%
Greece  84%
Indonesia 84%
Spain  85%

(various sources; there's an urban-rural split available at the earthtrends
site here:

Supposing that 3 billion people will be added to the world population in the
next 50 years, then if you fit an average of 4 people in a dwelling, you'd
need 750 million dwellings to accommodate them (in the US, there is an
average of about 2.6 people per household nowadays). Of course, people also
die, and a proportion of the housing stock is unoccupied (in Spain, about 7
million homes are unoccupied at any time), but nevertheless you'd need
several hundreds of millions of extra dwellings. From the stats I've looked
at in the past, housing construction does not increase nearly as fast as, or
in step with, home-ownership, i.e. the bigger shift has been from existing
non-owner-occupied housing to home ownership. All in all, sheer population
pressures suggest plenty scope for the residential real estate market in the
future, and a battle for Lebensraum.

"Man's most valuable and scarce resource is time for living. Time for living
always stands in relation to living space. Too restricted a living space
leads to a loss of time. Gadgets have an emancipatory effect to the extent
that they are really time-saving. In order for these gadgets to be used, the
living space has to expand. If you're only allowed six square metres per
person there is no room for your own stove, refrigerator, washing machine.
Why your own? The quantitative growth and diversification of needs is
accompanied by a growing need for privacy, which can only be satisfied by
larger homes. Once again, those who see the rebellion against lack of
privacy as merely an expression of 'bourgeois individualism' lack any
understanding of the misery that comes from a single stove having to be used
by five families, or a WC that has to be shared by ten families." (Ernest
Mandel, "The need for space as a global problem: a manifesto", in: Ole
Bouman & Roemer van Toorn, The Invisible in Architecture, London: Ernst &
Sohn, 1994, p. 129; in Mandel's architectural utopia there would be evenly
distributed "green urban villages" of 20-25,000 inhabitants - a bit unlikely
to happen I would say).


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