Opinion

Edward Hadas

Housing, the ultimate momentum trade

Edward Hadas
Jun 25, 2014 14:47 UTC

What will happen next in the housing market? The question comes up all the time in many countries, for an obvious reason: house prices jump around too fast for the good of the economy.

The price hyperactivity does not follow a uniform pattern around the world. Look at the indices of average prices for dwellings by nation, adjusted for inflation, compiled by the Bank for International Settlements. Since 2000, the real average price is up by 63 percent in the UK, by 49 percent in Switzerland and by 12 percent in the United States. The average Dutch price declined by 7 percent. In Germany, though, there has been so little house price action that BIS could only find data back to 2003. Since then, the average German price is down by a tiny 1 percent in real terms.

Basic economic indicators – GDP growth, employment levels and general price levels – can explain almost none of this variation. The patterns in the American and European economies over the last 13 years have been far more similar than the house price trends.

Concrete variations in the balance of housing supply and demand are more relevant, but more for differences within than between countries. Variations in planning rules and demographic patterns have been nowhere near large enough to explain the sharply different direction of house prices.

Finance is more relevant. The amount that people actually pay for housing is closely related to how much money they can get their hands on. That sum is strongly influenced by such financial factors as monetary policy, lending practices and tax rules. These have moved much more than anything in the real economy. For example, tax changes explain much of the Dutch house price fall.

Madoff/subprime – spot the difference

Edward Hadas
Jan 15, 2014 15:36 UTC

Bernard Madoff still has some magic. The public finds anything connected to the fraudster’s case fascinating, from a prison interview to JPMorgan’s agreement last week to pay $2.3 billion for Madoff-related sins. And why not? Madoff was a grandmaster of the confidence trick. But there is more to it than that. His way of doing business was alarmingly close to the perfectly legal practices which brought down the financial system in 2008.

To see that, compare Madoff to a hypothetical pre-crisis hedge fund manager – one with a special interest in U.S. subprime residential mortgage securities. The common tale starts with a commitment to provide higher returns than the economy can safely offer to financial investors. Both Madoff and the hedgie took in funds without making any specific promises, but their investors’ expectations were lofty.

Madoff, of course, knew that he could not live up to those expectations. That makes him smarter than the hedgie, who was either foolish, if he thought American house prices would keep rising for many years; or arrogant, if he was confident that he could sell out before the losses hit.

The knots of development

Edward Hadas
Feb 6, 2013 15:35 UTC

Why are so many poor countries stuck with huge economic problems? Why, for example, are there so many unemployed young people in Egypt – 41 percent of 19-24 year-olds? The poor state of British housing can help answer these questions. 

By developing world standards, the British housing system works quite well. In Egypt, it takes 77 bureaucratic procedures in 31 offices, and between six and 14 years, to get legal approval for construction of a new house, according to the 2012 doctoral dissertation of Abdel Hamid El Kafrawy of the University of Glasgow. The result: housing is in chronically short supply and 65 percent of the population live in unregistered and untaxed buildings. 

For a rich country, though, the UK does remarkably badly. Construction has been inadequate, at half the modest target rate set by the government in 2007. The relatively few new houses and apartments which are built are mostly relatively small – new American houses have almost three times as much floor space and new French houses have 45 percent more, according to a 2009 study by the British Commission for Architecture and the Built Environment. And rental and mortgage payments for these under-sized living quarters take a higher share of income in the UK than almost other developed country. 

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