Tuesday, January 26, 2016

Housing, A Series: Part 108 - The US is the outlier

The Economist has a great interactive graph to compare home prices among various countries.

Using their Price/Rent measure as a measure of relative home price appreciation, I recorded the values for each country that had data from 1995 to 2014.  This included 17 countries.

Of those 17 countries, 6 have not seen any significant increase in Price/Rent ratios since 1995.

Eight of the 17 had Price/Rent increases of at least 50%, that have are still near their highs, as of 2014.  (Ireland is a bit of an extreme case, and they are far off their highs, but they still have Price/Rent levels more than 50% higher than 1995.)

That leaves 3 countries out of 17 - the US, the Netherlands, and Spain - that had Price/Rent increases of more than 50% after 1995 which have since retreated below that level, most of the way back to 1995 levels.

So, if our housing markets had never boomed, we would have had a lot of company.  If our housing markets had boomed and remained elevated, we would have had a lot of company.  Either of these outcomes reflect conditions which are common in many countries.

But, a bust?  That is an anomaly - the US, along with the 16th and the 27th largest economies.  If we want to talk about specific national policies that created unique national outcomes, then we need to talk about the bust.  If we are going to talk about the boom across the countries that experienced it, there is some combination of low long term real interest rates and a lack of supply response in cities that attract productive workers.  It looks like the first question should be, "What policies did we have that kept prices so moderate, compared to most of the other major economies?"  And, our answer to that, probably, starts along the lines of, "Households in the US are relatively mobile, and even though sclerotic housing policies are spreading among many cosmopolitan cities across much of the globe, places like Georgia, Texas, and Arizona bucked that trend, and American households were willing to move there in large numbers."

The countries with no booms probably have a mixture of depopulation, liberal housing policies, and tax policies that minimize housing consumption.  We could talk about whether those policies could make sense in the US.

But, the one answer that seems like the wrong answer - "US banks, or US federal housing subsidies, pushed us into a housing bubble that was unsustainable." - is such a popular topic that it seems to have created its own bubble in popular non-fiction publishing.


  1. There may be something else going on too. There is a global glut of capital, and that's not a left wing idea. Bain & Co. has put out a report to that effect.

    There may be non-market reasons for this glitch, such as sovereign wealth funds, public pensions accumulating assets, insurance regulations, forced savings in the Far East, and some demographics.

    Given the reality that capital is abundant, we can expect lower interest rates and higher real estate values. The problem comes when the Fed tries to strangle real estate values, which are not "artificially high" sensibly priced due to global macroeconomic market forces and local zoning.

    1. You're right. But I think scale is important. In aggregate, it looks to me like about 1/3 of the nominal rise was due to lower interest rates, or capital glut. But, basically a capital glut gives you Dallas 2005 relative to Dallas 1995. A supply problem gives you San Francisco 2005 relative to 1995. The difference between the US and those other boom countries is more or less how much San Francisco do they have. The influence of politics and place is pretty outrageous when you think of a place like Sweden or Canada having a housing supply problem.

    2. The combination of a global glut in capital with provable Fed mispricing of MBSs, caused the housing bubble. Did the Fed want it? I think it did. But no matter, without the Fed, the bubble would not have happened. http://www.talkmarkets.com/content/us-markets/fed-premeditated-mispricing-of-risk-in-housing-oil-junk-bonds-and-other-markets?post=81636&uid=4798

  2. Any ideas on what makes the busts in the Netherlands and Spain, maybe even Ireland, similar to ours? Why haven't they sustained the increases like the other Euro countries that had similar increases?

    Along the same same lines, how did Germany and Italy seem to avoid a boom or a bust? I don't imagine they have vastly different policies than France and England, but I could be wrong.

    Probably very time consuming to get familiar with each countries specific politics, taxes, and regulations.

    1. Great question. And, you're right. Housing policy is so complicated, it is hard to get a read on various countries. I think most American commentators have a false view of homeownership as some sort of American institution, but US homeownership rates are actually moderate. Ireland and Spain seem to have very owner-occupier friendly policies and high ownership rates. And, Ireland's boom and bust were tied to a small economy with a very large banking sector.

      My limited understanding of Germany and Switzerland is that they don't have some of the homeowner tax breaks that other countries do, and they have very low ownership rates. They have high property taxes and somewhat friendly renter policies. This tends to lower property values but raise rents. So, they tend to have expensive housing and I think they have similar supply issues to the rest of the West (real housing expenditures are low) but home prices tend to be kept low.

      Those sorts of policies would probably help us here. In fact, Texas, where they didn't have a "bubble" does have relatively high property taxes. I think that places like San Francisco would work better for everyone if they imposed higher property and development taxes and removed their bureaucratic obstacles and corrosive policies like rent control. I suspect if a grand bargain is ever reached, it may involve something like that. It would mean capital losses for existing owners though. I also think, considering real estate prices nationwide are artificially low, now would be a great time to get rid of all of our owner-occupier tax breaks. Politics doesn't really seem to work like that, though, unfortunately. If politics were functional, the disequilibrium that has created the potential for those kind of changes would exist in the first place.

    2. One thing that may factor into Germany's situation (don't know about how much this is the case with other nearby countries) is the general lack of urban sprawl. German environmental policies on car usage (and other things like the setup of their public transportation) tend to encourage living in the city closer to work and discourage moving out to the suburbs.

      There's also the (possibly cultural?) feature that Germans seem not to value property ownership (or size of property ownership) as much, and often seem to prefer to spend less on rent and use the saved money for vacations; From the numbers I've seen it seems Germans spend a lot more on travel than, say, Americans (4X as much on international travel, though maybe because other countries are closer by over there), and spend by far the most of the European countries. Maybe the tendency to substitute travel for living space as a luxury purchase might help explain patterns in housing demand? Not sure how one would test that hypothesis though.

    3. I think you have good points here, but the causality is probably a little tougher than it seems. If policies were settled coming out of WW II that ended up defining German consumption behaviors, they might look like a cultural artifact, when they might really just be a result of having longstanding tax policies that reduce housing expenditures.

      This is similar to, say, US health care habits, where it may seem like we have certain cultural norms, but those norms themselves have been sculpted from decades of separating consumption from cost. At some point, the tendencies created by arbitrary tax policy become a part of the cultural inheritance.