In his new book Safe as Houses?, Neil Monnery indicates that housing has historically served as a fairly stable receptacle for savings – a hedge against inflation, but not necessarily a means of increasing wealth. Housing prices generally increase at a regular rate of 1% per year according to Monnery, less than the rate of consumer inflation. The explosive price increase that U.S. homeowners grew accustomed to after 1980 and especially during the 2000s housing bubble was an abnormality, not the rule.

This abnormality was not common to the entire globe. In Germany and Switzerland, housing prices remained flat or decreased (in both nations, about 60% of the demand for housing went to rentals). In Japan, real estate prices declined for two decades after the Japanese financial crisis of 1990, much as U.S prices did after 2006, eliminating price gains made between 1970 and 1990.

Thus, the past twenty years have seen total collapses of the housing market in nations like the U.S. and Japan, partial collapses in nations like England and France, and relatively little price change in nations like Germany and Switzerland where homeownership rates are roughly two thirds the U.S. rate.

The key difference between European and American housing markets is liquidity: the willingness of bankers to originate mortgage loans. In the U.S., banks were faster to issue bad mortgages, thanks to lax lending standards developed over nearly three decades of financial deregulation, declining interest rates and increased job participation.  U.S. banks have also been faster than their European counterparts to foreclose when those loans go bad.

In addition, American homebuyers have been more willing to walk away from negative equity properties, treating their homes as investments, not just shelter, to be easily abandoned when they go bad.

Since 2006, sales volume in Ireland dropped by 83% from its peak and Spanish sales volume fell by 64%. American deals, on the other hand, fell by just 46%. Regarding pricing, European home pricing has not fallen as far as American pricing so far, but will likely catch up in the long run under current management of the Euro.

The Euro zone has yet to clean up its economic troubles, and German-inspired austerity measures imposed over recent years have decreased demand (deliberately raising the risk of deflation) in the E.U.’s peripheral countries of Greece, Spain, Ireland, Portugal and Italy. For as long as those countries’ economies remain troubled with underperformance, they will pull England, France and Germany down with them. We are beginning to feel some fallout in the U.S. as well.

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The equilibrium trendline: the mean-price anchor

U.S. homeownership: an international perspective

first tuesday take

A home can only be safely seen as a long-term holder of wealth (thanks to the accumulation of equity by principal reduction as savings on rent expense) if, and only if, you do not repeatedly sell and buy over a lifetime. A home purchase is not a sure-fire investment opportunity.

While cyclical episodes in California’s housing market since 1980 have provided periods of rapidly increasing wealth (and rapidly decreasing wealth), historical pricing patterns suggest that a home is most reliable, and most useful, as a stable long-term receptacle for money saved by way of mortgage amortization: money that would otherwise have been spent on rent.

A word of caution:  prices in the next couple of decades will be held down by the inevitable rise in interest rates, since rates cannot be dropped as in the past 30 years to generate profits through asset inflation. Without that inflation to raise prices, rapid price increases will be even less likely.

To be successful, the time of purchase, price paid and durability of the location have to be correct on the first purchase of a home. Then, the homeowner will have to wait, occupying the home as a long-term dwelling place.

Re:  The Great Divide from The Economist