The Economist on global house prices

FYI

http://www.economist.com/agenda/displayStory.cfm?story_id=3886356

The Economist said:

while America’s ratio of house prices to rents is 32% higher than its average value from 1975 to 2000, by that metric houses are even more overvalued elsewhere: by at least 60% in Britain, Australia and Spain, and by 46% in France.

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hmm.

You have to wonder how much these publications actually understand about how housing markets work...

any fall in house prices could leave a lot of them with negative equity, forcing them to default.

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Negative equity doesn't force a default!

Prices have already begun to soften in places like London and New York, particularly at the high end, but it is possible that in most places price increases could simply moderate, giving incomes and rents time to catch up.

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And a bit over a year ago The Economist was expecting a total crash in the property market (as L Bernham posted on this forum)

Cheers,

Aceyducey

Where is Mr Bernham.

He was taking 30% drops or so?

Peter147

FYI:

Here's some of past Economist threads I was talking about - there's another one out there with the actual fall predictions by The Economist, but I can't locate it:
http://www.somersoft.com/forums/showthread.php?t=13182
http://www.somersoft.com/forums/showthread.php?t=13181
http://www.somersoft.com/forums/showthread.php?t=13167 (for the ANZ report which debunks The Economist's statements)
http://www.somersoft.com/forums/showthread.php?t=13566 (little bit of a reference)

Peter, L Bernham was talking 35-40% falls across the board for all Australian property that would occur within two years of his statement.

His statement was in late 2003. So we're about 18 months on.

I wonder if he's bought any property yet (he didn't own any at the time).

Cheers,

Aceyducey

Thanks, Glebe,

That was a great link - I fell about the place laughing (haven't felt so good in a long time) Where do they get their contributors???

Some of the bits I loved:-

And while America’s ratio of house prices to rents is 32% higher than its average value from 1975 to 2000, by that metric houses are even more overvalued elsewhere

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Well, what a surprise !!! They take figures from the top of a major boom (around '73) to the beginning of the "boom after next" (there was another in the late 80's) - and then quote "doom'n'gloom" by assigning an "average value" over those VERY selective years as being "the norm" !!!!

Now, if they'd taken figures from the BEGINNING of the boom ('72 or whenever) to the BEGINNING of the "boom after next" (say 98) I could start to consider their rantings as believable......

And then there's THIS:- Hehe
And I can't quote it, but it was something like "properties in the US leapt by 65% between 1997 and 2004" Say wha' ???

Isn't this LESS than the longterm normal average growth of properties - and they're calling it a boom?? A BUBBLE ?? And the sky's gunna fall.... ROFLMAO



Let's look at this sensibly - Hehe - I just LOVE this

Here we go:-

It seems the US house prices BOOMED by 65% in SEVEN YEARS !!! Oh. my - wish I'd had part of that....

Isn't that pretty close to 7.5% pa growth????? Is THAT a boom?? Or is that just property doing it's thing (and, arguably, BELOW the level of normal long-term growth). OK, if I were to cut the Economist a bit of slack, I could agree that we seem to be at the top of this boom, with some settling back likely in some markets..... But hell, if they want to be taken seriously, they really ought to be doing better than this. Start comparing apples with apples, and I might start listening.

Regards,

i too am surprised at the attitudes of the economist. normally they are spot on, though very conservative. i dont think residential property investing is really their forte

this is from a different article:

Homebuyers tend to underestimate their costs. Once maintenance costs, insurance and property taxes are added to mortgage payments, total annual outgoings now easily exceed the cost of renting an equivalent property, even after taking account of tax breaks. Ah, but capital gains will more than make up for that, it is popularly argued. Over the past seven years, average house prices in America have risen by 65%, those in Britain, Spain, Australia and Ireland have more than doubled. But it is unrealistic to expect such gains to continue. Making the (optimistic) assumption that house prices instead rise in line with inflation, and including buying and selling costs, then over a period of seven years—the average time American owners stay in one house—our calculations show that you would generally be better off renting (see article).

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the article is focussed more on renting vs buying, not so much investment. i cant link cause im a subscriber

some more of that article...

Be warned, if you make such a bold claim at a dinner party (that you are better off renting than buying), you will immediately be set upon. Paying rent is throwing money away, it will be argued. Much better to spend the money on a mortgage, and by so doing build up equity. The snag is that the typical first-time buyer keeps a house for less than five years, and during that time most mortgage payments go on interest, not on repaying the loan. And if prices fall, it could wipe out your equity. In any case, a renter can accumulate wealth by putting the money saved each year from the lower cost of renting into shares. These have, historically, yielded a higher return than housing. Putting all your money into a house also breaks the basic rule of prudent investing: diversify. And yes, it is true that a mortgage leverages the gains on your initial deposit on a house, but it also amplifies your losses if house prices fall.

<snip>

Home ownership is an excellent personal goal, but it may not always make financial sense. The pride of “owning” your own home may quickly fade if you are saddled with a mortgage that costs much more than renting. Also, renting does have some advantages. Renters find it easier to move for job or family reasons.

“If I don't buy now, I'll never get on the property ladder” is a common cry from first-time buyers. If house prices continue to outpace wages, that is true. But it now looks unlikely. When prices get out of line with what first-timers can afford, as they are today, they always eventually fall in real terms.

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The divergence between rents and house prices is, of course, evidence of a housing bubble. Someday prices will fall relative to rents and wages. After they do, it will make sense to buy a home. Until they do, the smart money is on renting.

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It can be argued that the article makes sense in theory

a renter can accumulate wealth by putting the money saved each year from the lower cost of renting into shares

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but I think it is a fair assumption to say that the majority of renters are spending the savings from "the divergence between rents and mortgage repayments" on doodads and other non-investments.

Either that or they can't afford to buy the property in the first place, so renting is the only option.

G'day Pete and MMerlin,

Now THESE quotes (that you two provided) at least make some sense.

Reading from one of Acey's earlier links, I noted that contributors to the Economist are "anonymous" - and, as such, it seems we can get "good stuff" mixed in with "a crock" in the Economist. How do they select their contributors? Are there standards? Editors???????

How do you see "The Economist" generally? Are their articles realistic 50% of the time? Or higher?? Or ......

Regards,

Les,
The sarcasm of your first post doesn't portray you in a healthy light.

Glebe.

Glebe said:

Les,
The sarcasm of your first post doesn't portray you in a healthy light.

Glebe.

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Glebe,

Your inability to look beyond yourself doesnt portray you in a healthy light.

Les was speaking about the article you linked, rather than you personally (he actually thanked you for bringing it to his attention with his first few words - perhaps you missed it), and he indeed raised many great points - my personal opinion is that the article is great for wiping my ar$e with in the toilet, and thats it.

Not sure why you took it as a personal slight. Les is actually one of the main reasons we have a forum, a great contributor, and a wonderful guy as well (knowing him in person).

Perhaps next post you can provide something positive, rather than negative.

All the best,

Jamie.

Umm yeah was drunk sorry Les...

I used to be a subscriber of the economist, as I liked their worldwide coverage.

However, I have found their writing style to be too authoritative, sometimes even arrogant. Not the best thing if you follow their predictions.

I have never marked them high on predictions. In the early 90's, they were talking about staying way from the stockmarket.

It's been my experience that economist don't often make accurate predictions. Perhaps they are too theoretical. After all, the fact that emotions are a significant factor in investment decision has only been recently put in a theory, called behavioral finance.

Cheers,

i agree. i mainly read it as an overview of whats going on in the world, and for a bit of economic/finance news. i lived in london for a year and realised australian newspapers are largely arse, there are around 11 different newspapers available in the city of london, and australian papers look like cheap, muck raking tabloids in comparison (because they are ).

i find the economist is quite insightful when it comes to world politics etc, the magazine is split into different sections for geographical news (the americas, london, europe and asia) and sections on business and economics/finance. they are very conservative, but one thing i like is they are very clear on their personal agenda and forthcoming with their biases. they are conservative in an alan greenspan kind of way, not a miranda devine kind of way. they dont put names on the articles as they aim to speak with "one voice", and overall they do it quite well. for instance, whomever is in charge seems to say "we think its a good idea the IMF does x because of y and z", and all the articles will state the belief and reasoning, so you know what you are getting, whether or not you agree with their view is up to you. i read a few issues of the far eastern economic review but it doesnt really compare. i dont know how the economist chooses their writers, but they seem to be fairly well respected journalists, who stay with the economist a long time (they occasionaly have features staff writers when they retire), i think it is assumed they would select people with similar outlooks that the newspaper presents.

ultimately australia is fairly insignifcant in the global scale of things, we have a small population and are far away from the rest of the world. i personally believe thats a large factor why life here is so good, if a tad quiet. i dont have the time to read the economist cover to cover as i used to, though i wish i did. now i just read the afr and my local paper.

G'day Glebe,

The sarcasm of your first post doesn't portray you in a healthy light.

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Sorry it came across that way. Having re-read it from YOUR point of view, I can see how you might get upset about it. The written word is a bit of a problem at times. In short, I DID enjoy the article - and thanks for taking the time to post it.

To save others going back, this is what I wrote:-

That was a great link - I fell about the place laughing (haven't felt so good in a long time) Where do they get their contributors???

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And Jamie was right, I was meaning the link as being the source of my mirth (though the words might've been ambiguous). Glebe thought I was having a crack at him (read it as "That was a great link - I fell about the place laughing" and it COULD sound like I was being sarcastic..... especially as I then picked the article to pieces)

Regards,