The drastic increase in real-value prices for residential use in relation to the reduced growth of disposable household income in the Western countries always creates imbalances in these real estate markets. Such imbalances are called ‘bubbles’ and are very dangerous if no corrective action is taken not only for the markets in which they are developed but for the entire economy concerned.
This type of “bubbles” has been seen to be formed in the last four years (2015-2019) in the property markets for residences both in the UK (London) and in the EU member countries i.e. the Netherlands (Amsterdam), France (Paris), Germany (Berlin), Sweden (in the whole country), Spain (Barcelona), but also in other countries of the West such as Canada, New Zealand, Australia, USA (New York, San Francisco).
by Thanos S. Chonthrogiannis-https://www.liberalglobe.com
Photo by Author: Calgary_panorama.jpg: Calgarypano
Source: Calgary_panorama.jpg
licensed Public domain, https://creativecommons.org/publicdomain/zero/1.0/deed.en
Why the real estate market for residential use is extremely important
When demand in housing is strengthened in relation to supply it is because borrowing rates are kept long-term at low levels allowing consumers to borrow cheaply for home purchase and always for specific level of disposable income. While at the same time the consumers are increasing other expenditures since they feel richer because of their easy access to money.
However, the drastic increase in expenditures increases the prices of all products and assets. This furnished well-being can be seen when we compare annually the increase in the prices of products and real assets equally, in this case the annual increase in the purchase prices of the real estate market for residential use with the annual increase of the annual disposable income of households and borrowers-mortgagers who have acquired a home.
The most effective measurement is the relative value that exists between the annual increase in the purchase prices of residential properties in relation to the annual increase of the daily wage of the unskilled worker. This measurement shows us the real picture of what is happening with the prices in the real estate market for residential use in an economy.
At the same time entrepreneurs who are activating in the property market for residences due to the long-term low lending rates borrow capital either to invest it in the construction of new homes or to repair existing old residences for exploitation. Consumers because of low interest rates are reluctant to save enough so the banks are not able to finance new investment plans.
In the fact, the problem lies when the prospects of the economy or the prospects of the global economy are bleak. In the current era where the global economy is slowing while the trade war between China and the US can become more severe, at the same time increasing the likelihood of disruption of the smooth flow of oil and liquefied natural gas to global markets causing prices to increase, the chances of many citizens’ disposable incomes being reduced drastically (due to cuts in business profits, job losses, etc.) are increased.
In such an undesirable situation, many people will not be able to serve their mortgages, so they will force to sell their homes at much lower prices with aim to repay their loans or to lose their homes due to non-service of their mortgage.
Entrepreneurs will be trapped in a situation of reduced demand and increased borrowing costs. New investments will lose their value and real resources will be lost.
Fictional prosperity will have led to a painful recession. In this case, the fall in housing prices will be high and fast, causing a severe financial crisis in the economy under consideration. In this case the biggest problem will have both borrowers and banks.
Around the housing market for residential use in addition to the construction sector, other seventy professions are involved.
Essentially, the construction and housing construction industry is the locomotive of the internal economy and development, giving an outlet for unskilled workers, keeping unemployment in these poorest income workers at low levels. The mortgage loans that banks allocate are the most important part of their balance sheets.
How the situation in the real estate market is evaluated
When the demand for housing is strengthened, the rents are reinforced respectively. The main reasons for boosting demand are, long-term maintenance at low levels of borrowing rates, increased employment rate and population growth due to internal or external migration.
The housing market for the purpose of its exploitation through rental is a popular investment activity that pays off when bank lending rates are low and the returns from the financial markets are uncertain.
When the housing market is depressed and it is difficult to sell, it is quite difficult to rent. When the housing market is on growing market prices and it is easy to sell, it is easier to rent. The yield of the property-house through its rental is determined by the following type:
Yield of the property=((Income from rental–housing expenditures–taxes) / Value of property) x 100%
This yield of property is used to compare with the returns (yields) of other types of investments. This yield of property which comes from rental activity looks very much like the interest rates that Banks and Building Societies used to quote in savings and performance accounts equally and other type of investments etc. and gives a useful insight into the return on investment.
Other indexes which are used to assess the situation in the real estate market are the relative value between:
- Purchase prices (rent) of real estate / Property rentals
- Purchase prices (rent) of real estate / Disposable household income
- The corresponding changes in the above indices on an annual basis.
- Annual change of actual prices / Annual change in the daily wage of unskilled worker
- Total number of mortgages in the economy / GDP of the economy under consideration.
The “bubbles” in the housing markets in Western countries
A. From 2015 to date, rents for homes are growing at a much higher rate than the corresponding time increase in the average disposable income of households. More specifically:
EU
Spain (Barcelona), rents increased more than 50% due to increased tourism.
Netherlands (Amsterdam), rents increased more than 64,6% in relation to the increase of the average disposable income for the same time period.
Germany (Berlin), rents increased more than 64% in relation to the increase of the average disposable income for the same time period.
France (Paris), rents increased more than 32% in relation to the increase of the average disposable income for the same time period.
UK (London), rents rose by 30% more than the corresponding increase of the average disposable income for the same time period.
Canada rents increased more than 24% compared to the increase of the average disposable income for the same time period.
New Zealand rents increased more than 22% in relation to the increase of the average disposable income for the same period.
B. From 2015 to date, housing market prices are increasing at a much higher rate than the corresponding time increase in the average disposable income of households. More specifically:
EU
Germany, housing market prices increased 20% more than the corresponding average disposable income for the same time period.
Belgium, the housing market prices increased 38% more in relation to the corresponding average disposable income for the same time period.
France, the housing market prices increased 20% more than the corresponding average disposable income for the same time period.
Sweden, the housing market prices increased 46% more in relation to the corresponding average disposable income for the same time period.
UK (London), housing purchase prices increased by 25% compared to the corresponding average disposable income for the same time period.
Canada the purchase prices of residences increased 55% more than the corresponding average disposable income for the same period.
New Zealand the purchase prices of homes increased 22% more than the corresponding average disposable income for the same time period.
Australia the purchase prices of residences increased 36% more than the corresponding average disposable income for the same time period.
Remedies to implement measures to limit the rise in housing market prices
1. Apartments should be purchased and wherever they are available from local governments in order to increase the existing supply of homes for disposal to the public.
2. In addition, central governments should release funds to continually build new dwellings that can be made available for sale and/or rent to citizens.
3. To tax the purchase of housing by foreigners at a higher tax level compared to that applicable to domestic citizens.
4. Prohibition on foreign nationals (in extreme situations where the house supply is limited due to the size of the country and the growing population) to buy dwellings in order to limit the rapid rise in housing purchase prices.
Measures to limit the growth of rents
Most of the measures to be implemented to limit the increase in rents favour tenants at the expense of homeowners-landlords. Measures such as, rent freezes for specific periods, increase rent based on inflation, renter’s stay in the property until the expiration of the contract regardless of whether the property has been sold are measures favoring tenants (theoretically the weak group) against the homeowners-landlords.
The owners will not be able to profit from the exploitation of their property and sooner or later they will be forced to sell their properties due to a minimum profit or sustainable deficit.
I always refer to homeowners-landlords who are owning one or two residences and renting them in order to supplement their low disposable income.
On the other hand, measures restricting rents give the wrong signal to professional investors in the real estate sector, forcing them to turn in another country their investment look, gradually withdrawing any investments that they have already done in this country/town. At the same time, there is a climate of suspicion in the real estate market.
The only case for the rational application of these measures is for these measures to be applied based on individual tenant income criteria. In this case, however, we have a serious violation of individual & personal rights of tenants.
The balance in a free market comes through the price which each time balances the existing demand and supply for a particular asset. Any interference with it will cause imbalances and distortions in this real estate market.
The fact that local and central governments, respectively, are more interested in protecting tenants (theoretically the weaker group) has to do with the rates of homeownership in these countries.
The relatively low rates of homeownership reduce the political power of any homeowners-landlords in relation to the political power of tenants whose political forces translate into votes in elections.
The demand for housing in all these countries is not going to fall as most people on the planet want to live in these countries. Not because they are wealthy countries but because they are States of Law and they will always try to approach perfection as States of Law. It is this fact that these countries are State of Law that makes these countries to be magnets of wealth and opportunities.
If the rest countries of the world do not try to become states of Rule of Law, they will increase constantly the migratory flows towards the West countries by continuously fueling the demand side of housing markets in the countries of the West.
Thanos S. Chonthrogiannis
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