Real Estate

Which was the housing’s trend? Let’s analyze it in some countries. The way for reporting trends is to refer to the House Price Index (HPI). The index is a weighted, quarterly measure of the movement of single family house prices.

US HOUSE PRICE TREND

Starting from the 1st quarterly of 1975 the house price index in US had an increasing trend up to the second quarterly 2006. In 2006 there was a max of 896.5. In other words, if an house in 1975 had a value of 100.000$ then in 2006 it valued 896.500$. Considering the house price index adjusted for inflation, considering an house of 100.000$ in 1975, then in 2006 the same house had a value of 234.200$.

What happen in 2006? In 2006, in US the house bubble collapse started. The house bubble started in 2000 and reached the max in 2006. The collapse was from 2007 up to 2010 long.

Which were the causes of the house bubble? There are a lot of causes:

_ HOUSING TAX POLICIES: Tax Policy of 1971, Tax Reform Act of 1986, Taxpayer Relief Act of 1997. The tax policies made housing the only investment was excluded by capital gain;

_ DEREGULATION IN BANKING from 1980. Therefore many risky products were allowed. Easy credit was possible;

_ MANDATE LOANS. In 1992, a mandate, the Housing and Community Development Act, was imposed to the Federal National Mortgage Institution (Fannie) and to the Federal Home Mortgage Corporation (Freddie). The mandate established affordable housing loan purchases. In 2000 the affordable housing loan purchases should be at least 52%. Therefore in 2008 Fannie and Freddie Institutions announced low-income and minority loan commitments totaling $5 trillion. In order to meet the commitments there was probably a loose of lending standards;

_ LOW INTERESTS RATE. The Federal Reserve monetary policy characterized by low interest rates for long periods. After the dot.com bubble collapse from 2001 to 2002 and related recession the Federal Reserve promoted bank credit lowering the interest rates. As consequence banks made loans. In 2006 interest rates increased with an increased of monthly payments for adjustable rate mortgages. Moreover mortgages was bounded together and sold as financial product to national and international investors. The rate of investment was very high and rating agencies valued the financial products as top-rated products;

_ BELIEF THAT HOMES WERE GOOD INVESTMENTS. That is considering homes as an asset which value is expected to grow in time. The volatility of house price is less perceived due to yearly on less often reports and folks expect that home prices don’t fall;

_ MEDIA PROMOTIONS. From 2005 to 2006 a lot of media (tv, journals, books…) promoted real estate investments;

_ INCREASING SPECULATIVE PURCHASES OF HOMES ;

_ INCREASING HOUSE PRICES WITH RESPECT TO ANNUAL RENT. From 1945 to 2006 the house prices as multiple of annual rents increased from 15 to 26. That’s due to geographical and to regulatory constraints;

_ DOT.COM COLLAPSE. With the stock market collapse then the house market began the primary market for speculation;

_ MORTGAGE-BACKED PRODUCTS (mortgage-backed security, credit default swap, collateralized debt obligation) WITH LOW INTERESTS RATE AND LAX LENDING STANDARDS. These products due to the irrational low interest rates attracted subprime mortgage consumers (people that may have some problems to give back the borrowed sum). In 2007 there was an high home foreclosure rate. As consequence 25 subprime lenders failed.

EURO AREA AND EU HOUSE PRICE TREND

Euro Area: Belgium, Cyprus, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Luxemburg, Malta, Netherlands, Austria, Portugal, Slovenia, Slovakia, Finland.

EU: Belgium, Bulgaria, Czech Republic, Denmark, Germany, Estonia, Ireland, Greece, Spain, France, Croatia, Italy, Cyprus, Latvia, Lithuania, Luxemburg, Hungary, Malta, Netherlands, Austria, Poland, Portugal, Romania, Slovenia, Slovakia,  Finland, Sweden, United Kingdom.

In 2007, different countries all over the world were involved in the house bubble collapse. Among these countries there were a lot of Euro and EU area: Austria, , Malta, Britain, Netherlands, Italy, Denmark, Germany, Portugal, Ireland, Spain, France, Luxembourg, , Poland, Greece, Bulgaria, Croatia, Swaziland, Romania. The graphs show the aggregate price variation in the EU and in the Euro Area. Prices increases up to 2007 then started decreasing around the same prices of the 1st quarter of 2005.

After the house bubble collapse in 2005, the house prices in real terms decreased for many EU countries. In As the graph illustrates in France there was a slight decline. Despite of the increasing prices of houses (even in real terms), in Belgium and in Sweden there was not a bubble collapse.

ASIA TREND

In the early 1970 Japan broad urbanization brought about an housing price appreciation. In 1980 other Asian countries like Singapore, Honk Kong, Thailand, etc. were characterized by a broad urbanization. Also in these countries the urbanization process were associated with increasing housing price. The housing development, housing finance and housing prices increased up to 1997, the year of the Asian financial crises. House prices increased also because of easy and affordable mortgages. The 1997 financial crises -started in Thailand due to the collapse of its currency -stopped the increase of house prices.

JAPAN TREND

In Japan, the real estate bubble was not correlated to the Asian financial crises. With respect to other Asian countries, Japan was one of the first country to start the development process. Starting from 1986 to 1991  real estate prices have great inflated. In detail, house prices most increased in the six biggest cities of Japan: Tokyo, Yokohama, Nagoya, Kyoto, Osaka and Kobe. Both commercial/industrial and residential land prices increased due to the size, the geographical position (Japan territory has not vast areas for building) and of the commercial importance of these cities. The maximum price was reached in the first quarter of 1991. By the end of 1991 prices started to fall. In 1992 there was the bubble collapsed. Nowadays the real estate prices are lowest than house prices in 1975.

HONG KONG TREND

Since 1990 the house price in Honk Kong has increased. That’s due to the urbanization and to the really developed mortgage market. In 1997, the Asian financial crises affected also the real estate market. Home prices fell. Since 2006-2007 home prices has started increasing again. Nowadays, Honk Kong is one of the most increasing real estate sector of the world.  The increasing home price lead to increasing vacancy rate.

CHINA TREND

Real estate dates for China started from 2000. Economic growth, government policies for keep low interest rates on mortgages and cultural elements were the causes for the huge increase of the house price from 2005 to 2009. In 2009 house prices stopped but one year after they re-started to rise. After 2009, urbanization, increasing low and affordable mortgages were the driver force of increasing house prices. At the end of 2011 prices began to fall.

SINGAPORE

The graph shows that Singapore’s  real estate prices fluctuated in time (11 year cycke). Prices follow price cycles that are correlated to local economy (economic growth, export/import, inflation). The Asian financial crises affected also the real estate sector in Singapore. In 1997 it recorded the biggest decrease in home prices. Starting from 1990 the government has induced investments in private real estate. Therefore the real estate prices started to increase.

AUSTRALIA TREND

Since 2000 the Australia real estate trend has strongly increased. In the second trimester of 2010 the maximum house price was reached. An house that in 1975 had 100.000$ value then in 2010 it had 1.680.700$ value. Some  economists/ researchers believe it’s a bubble, some others claim that house prices are sustainable. Therefore it isn’t a bubble. The motor driver of the “bubble” is the China driven commodities export boom (a commodity bubble). That’s because Australia is rich of natural resources as iron, coal and agricultural products and China needs iron and coal in order to build cities. As consequence, there has been an increase in the stock market.  Other factors that led to increasing house prices are: low interest rates and lowering credit standards, government policies (favorable taxes for investors and home owners, limited government permissions of building in new areas), home supply lower than home demand, increasing population growth rates, media promotion and national and foreign speculative investments.

CANADA TREND

Since 2000 real estate prices have great increased. The increasing Canadian house price bubble is very similar to the Australian one. That’s because the increasing house prices are mainly driven by the commodity export boom to China. As Australia, Canada is rich of natural resources as oil, metal and grains. The Canadian bubble can be compared to the US bubble because in order to buy very expensive houses (Vancouver houses are more expensive than the New York houses), Canadians get into debt. Housing are also inflated by foreign investments. That’s because high interests on Canadian bonds and other high profitable investments attract foreign capitals.

SOUTH AFRICA

In South Africa , the residential market covers nine regional housing markets corresponding to the nine provinces: Western Cape, Northern Cape, Eastern Cape, Northwest, Free State, Lesotho, Gauteng, Limpopo Province, Mpumalanga, Kwazului Natal.  Since 2004 house prices have started to increased. Empirical evidence shows that the house price increase is linked to macroeconomic variables:

_ poor credit worthless lending criteria and quite low interest rates;

_ economic, employment and household income growth;

_ consumer’s credit-risk profile and banks’ risk appetite.

In any case in the 3th trimester 2007 prices had a short stop followed by increasing house prices again. Note that after 2007, real house prices have decreased.

BRAZIL

The following graphs illustrate the House Price Change and the House Price Index for Sao Paolo from January 2009 to June 2012. Sao Paolo is the capital and the biggest metropolis of Brazil. According to the Global Real estate index in the 4Q 2010 Brazil is ranked n. 3 for increasing house prices. House price increases can be explained in different ways: first of all the low cost of mortgages. From 2009 to 2012 mortgages are increased of 550%. Other reasons are government house plans: the “Minha Casa Minha Vida” program and the “Minha Casa Melhor” program with 2 billion available credit for promoting house purchasing. Other causes are consumer behavior: Brazilian thinks that houses are safe and profitable investments. Also economic growth (thanks to the richness of natural resources of Brazil) and therefore and athe increasing consumer’s possibilities contributed to house prince increase.

WHY DOES HOUSE PRICES INCREASE?

As for any commodity house prices follow the law of supply and demand. Therefore house prices increase when the demand exceed supply. What is less obvious are the causes of the house supply increase. Analyzing real estate prices in different countries and most of all analyzing  real estate bubble it is possible to trace back causes. In detail house supply increases because of:

–          Monetary policy: low interest rates therefore more accessible mortgages, increasing inflation rates that lead consumers to believe house investments to be a protection against inflation;

–          Government policies: incentives and credit issuing with regard to the real estate sector, tax policies that make investments in houses more convenient than other investments, banking deregulation policies that lower credit restrictions.

–          Macroeconomic factors: economic growth and increasing exports. Richer people can consume and invest more and the real estate sector lend itself to investments.

–          Geographical boundary (e.g. a good commercial area is bounded by the sea), lack of building permissions;

–          Media promotion;

–          Consumer culture with regard to real estate (folks believe that houses are good investments, people’s desire to be home owner).

HOW TO GET PROFITS ON HOUSE PRICES?

Studying the real estate graphs is a starting point. Following the trend, as usual, is a profitable strategy. But it’s a basic strategy. Honestly it was my grandmother’s strategy. I think I can do better. Well. Today the market is sophisticated. Quite easy quite complex. But if you know how to do you can make big deals with few dollars. Real estate is good way to understand how to be rich. I you wanna manage it you need take a look to the world economy.

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