Are home prices rising everywhere? Let’s take a look.
Why you Should Care: Shelter is one of the three staples of life. Thus the cost of a home – whether we rent or buy – is of critical importance to each of us.
Taking Action: Buy a house. If you already own one, buy another. Property values and interest rates are inversely correlated. This has always been the case. But never more than today.
Throw into the mix low for-sale inventories and the large barriers to new housing supply and you have a recipe for serious home value gains.
If you agree that interest rates will remain at these low levels for a protracted period, owning a home (or investment real estate) is solid investment choice.
You might even consider buying one in another country…like Canada. Not only are prices rising (in the major cities) but right now 77 cents (US) equals one Canadian dollar. We’re an FX winner here! Vancouver is a beautiful city!
The Blog: Real estate is a local phenomenon. What’s happening in your community is far more important than the goings-on in, say, London. But global trends are interesting…and can be a window into a possible future right here in your neighborhood.
Here’s a great graphic from a recent IMF report on housing:
First, notice these are ‘Real’ house prices. You’ll recall this means the numbers shown here are adjusted for inflation.
The countries occupying each end of the chart are interesting. Home prices in the Ukraine and Russia are getting killed. At the other end of the spectrum, Sweden is on a tear – up over 14%. And here in the US, the report says we’re up 4.84% in the last year.
What’s driving the price movement? Many experts feel home value price increases are highly correlated with growth in credit, or lending, within the marketplace. If this correlation was high, we’d expect to see the countries occupy the identical slot/position on both the chart above and the chart below:
This appears to be true for the Ukraine…but Russia has moved 13 slots to the right…and Sweden, 6 to the left. In Mexico, credit has expanded faster than all countries on the chart, but their home values are up only 4.42% over the past year. Slower than the US.
Something else must be at work here.
Interest rates. More specifically, very low long-term interest rates for a very long time. A few days ago, Bloomberg posted an article titled, “Million-Dollar Suburbs Soar in Wake of Australian Housing Boom.” In the article,
“Home prices nationwide have soared almost 40 percent from a low in May 2012, underpinned by investors, who faced with low returns from other asset classes took advantage of record low interest rates and a favorable tax system for landlords to pile into the property market.”
And check out this graphic:
Staggering.
We’ve seen that Sweden boasts the greatest value increases over the past year. Unlike the US, ‘interest only’ mortgages are available and common here. Recently, attempting the slow value increases, the government has required (1) a minimum 15% downpayment and (2) mortgages exceeding 50% LTV must be fully amortizing.
Ironically, the US has seen only lukewarm property value increases during this time. Very tight credit/underwriting standards have made new credit harder to obtain; while, at the same time, loan options such as ‘interest-only’ are no longer available to most borrowers. In some respects, these restrictions have kept a lid on prices here.
But not for long. The longer mortgage rates stay this low, the higher prices will rise. Over time, as more home buyers and home owners decide this is the ‘new normal,’ price increases will accelerate here in the US.
- Terry Liebman
Terry Liebman 