Housing market update; Some analysis and ideas given current monetary policy

I wanted to put out a quick update on the housing market, and while I wish to concentrate on the dynamics influencing the markets in the United States, we can observe the same secular trends throughout the former Commonwealth nations and Europe.

I have to conclude that residential real estate will continue to benefit from the highly coordinated central banking policy that was implemented in the wake of the Great Recession. While the numbers and ratios will be higher in the former Commonwealth markets, I see a gradual lift in prices throughout 2020 in most areas.

  • The combined value of every residential home in the United States was $33.6 trillion at the end of 2019, up 3.4% ($1.1 trillion) from a year ago and 51% ($11.3 trillion) from the start of the decade.
  • The total value of the U.S. housing stock is almost equal to the combined 2018 GDPs of the U.S.A. (~$20.5 trillion) and China (~$13.6 trillion), by far the world’s two largest national economies.
  • Despite these ostensibly troubling trends, mortgage debt growth remains subdued.
Although IRC tax changes to real estate since the late 1990’s and lower mortgage rates have benefited real estate when measured against GDP, we do take note of the growing disparity
Despite higher house prices, mortgage payments as a % of disposable income have been dropping since the Great Recession. Lower interest rates have helped out on this front.

I have been keeping tabs on the Australian real estate market ever since several subscribers asked me to comment on it about a year ago. Indeed, despite affordability issues, I still see prices moving north.

Source: House price bounce leaves first home buyers behind, abc.net.au

Just when significant property price falls of around 15 per cent in Sydney and more than 10 per cent in Melbourne gave some prospective purchasers a sniff of breaking in, those markets turned around and launched higher again.

In fact, the last three months of 2019 saw the fastest quarterly property price growth in a decade, according to CoreLogic’s numbers.

Nationally, home prices rose 4 per cent during the fourth quarter, with increases of more than 6 per cent in both Sydney and Melbourne.

While Sydney and Melbourne, as well as the national average, are still below their 2017 peaks, at the current pace of growth those record price levels are set to be broken by March this year.

House price bounce leaves first home buyers behind, abc.net.au, January 16th

Last Spring and Summer we concluded that the malaise would soon end as the RBA and Australia’s Federal government would not tolerate any protracted downturn, and that any slowdown should have been viewed as a buying opportunity. Though aggregate house prices have not eclipsed their former highs, it is estimated that they will probably take them out in a few months.  We correctly picked the most likely outcome and prices have begun to rise again, even though affordability issues continue to intensify.

We observed throughout 2018 that the central banks can no longer tighten monetary policy. Thus, their ongoing programs will continue to benefit house prices. The world is awash in U.S. dollars with low borrowing costs, and housing near the global cities of influence will continue to receive a bid, regardless of rental rates.

Though the growth in house prices have been rising higher than rents, the disparity can be attributable to lower interest rates, which have lowered capitalization rates

While house prices viewed through a wide lens could be seen as relatively more expensive based on long-term historical trends, we need to be prepared for the most probable scenario; the central banks will continue to guide the yield curve lower over time as all this outstanding sovereign debt will remain in service.

I do not want to stand in front of this train, and while prices and yields may look relatively unattractive, depending on the market, some decent deals remain for those who are under exposed to rental property investing.


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