Tuesday, January 16, 2007
Housing Prices And North-American Wealth
Every party is followed by a hangover.
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Housing prices fundamentals depend a great deal on the wider economy, especially income and borrowing rates. More specifically, housing prices bear chiefly fret over two important measures: 1) the ratio of house prices to median income and 2) the ratio of rental income to house prices.
House prices to median income now equals 3.8 pretty much in both the United States and Canada, which means that the median price of an interest in land is now getting out of reach of the average North-American household. This measure is the primary catalyst to what economists refer to as ‘The Affordability Crisis', and is becoming more and more a concern. The Affordability Crisis is a very serious matter indeed. It has economic, political, social and demographic reverberations and repercussions.
The hot local real estate markets of recent times have driven prices literally through the roof and since home-ownership is the single most important element in the democratization of prosperity, un-affordability becomes a social problem just as much as an economic one. It impacts the very essence of North American wealth reserves and distribution, because home-ownership is the element of social stability and cohesion and, therefore, an important pillar of a sustainable modern economic capitalistic growth.
The second measure, the ratio of rental income to house prices is too low to offer property owners and investors a decent return, suggesting again that houses are badly overpriced. At 0.5 percent, rental income over house prices indicates that investors will think twice before purchasing rental properties, since they have investment alternatives. For instance, here in Downtown Vancouver it used to be, only a couple of years ago, that purchasing an apartment unit and then rent it out would net a yearly return of over 8 percent. But since rental rates have not followed at par with real capital appreciation, taking into account increased property tax the yield is nowadays less than 5 percent.
Nearly everyone now expects prices to level off for a bit and slow the economy down, but in ultimate analysis the foregoing valuation measures are less worrisome than one might think at first.
The high ratio of house prices to income is less alarming because low mortgage rates in both the United States and Canada have held down the real, effective cost of owning a home. This cost has not changed much despite an upward shift in interest rates, which in turn has increased volatility in real estate markets. North-American homeowners, especially in the United States, remain exposed to a sharp rise in long-term interest rates if, say, foreign investors in the American Treasury were to start selling bonds and put their money elsewhere. But this does not seem to be the case for the time being, as confidence in American financial stability is at an all-time high.
Furthermore, although it is true that rents have failed to keep pace with the rising prices of interests in land, that comparison partly reflects a failure to adjust for the growing quality of the homes Americans and Canadians have been buying. This, coupled by the fact that demand for rents is now beginning to move up, would suggest that rising rents could raise the threshold and set the ratio on a more balanced footing - so long as incomes keep growing.
An additional reason for optimism is that prices of real estate in Britain and Australia, two other countries that bubble-watchers have been fingering as examples of the impending and devastating real estate bubbles in North America, have proven much less damaging than many expected. Their respective economies have performed so well after real estate markets peaked, that their central banks found it necessary to raise interest rates again afterwards.
For all the foregoing reasons many economic forecaster and analysts here do not believe that a recession is around the corner merely because of the slowdown in real estate. And I am one of them.
Luigi Frascati
Real Estate Chronicle
Labels: REAL ESTATE ECONOMICS
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Great insights Luigi. It is refrshing to here someone say that the world will not end with a downturn in real estate.
# posted by 
: January 16, 2007 11:24 AM
: January 16, 2007 11:24 AM
I would hope not .....
There are, however, clouds looming on the horizon. It is yesterday's news, for example, that Hugo Chavez of Venezuela has announced the nationalization of all oil fields - a great blow mostly to European oil concerns (BP, AGIP etc. ) that have invested fortunes in the exploration and extraction rights of that state.
Late last week Syria has announced the conversion of the country's foreign reserves assets into Euros, thus becoming the second nation after Iran to drop the American Dollar.
These are all things to keep a keen eye upon this year, as if they indeed can have a profound and divisive impact in this globalized economy, and thus on real estate as well.
I hope I am not sounding too political here ...
There are, however, clouds looming on the horizon. It is yesterday's news, for example, that Hugo Chavez of Venezuela has announced the nationalization of all oil fields - a great blow mostly to European oil concerns (BP, AGIP etc. ) that have invested fortunes in the exploration and extraction rights of that state.
Late last week Syria has announced the conversion of the country's foreign reserves assets into Euros, thus becoming the second nation after Iran to drop the American Dollar.
These are all things to keep a keen eye upon this year, as if they indeed can have a profound and divisive impact in this globalized economy, and thus on real estate as well.
I hope I am not sounding too political here ...
I was unaware until recently the global importance of the American Dollar. The power the Euro now controls is staggering. The global economy is changing, perhaps not for the better if you are Canadian, and so closely tied to the US of A. I don't my political talk, it is good for the intellect.
Have a great day.
Have a great day.
# posted by : January 17, 2007 5:21 PM
: January 17, 2007 5:21 PM
Finding the Perfect Neighborhood
The neighborhood you choose can have a big impact on your lifestyle—safety, available amenities, and convenience all play their part.
Make a list of the activities—movies, health club, church-- you engage in regularly and stores you visit frequently. See how far you would have to travel from each neighborhood you’re considering to engaging in your most common activities.
Check out the school district. . . . www.ExchangeCA.com Finding the Perfect Neighborhood
La Jolla Real Estate
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The neighborhood you choose can have a big impact on your lifestyle—safety, available amenities, and convenience all play their part.
Make a list of the activities—movies, health club, church-- you engage in regularly and stores you visit frequently. See how far you would have to travel from each neighborhood you’re considering to engaging in your most common activities.
Check out the school district. . . . www.ExchangeCA.com Finding the Perfect Neighborhood
La Jolla Real Estate
# posted by : February 26, 2007 11:03 AM
: February 26, 2007 11:03 AM << Home
