Sunday, July 08, 2018

Containing Property Prices



Many major cities are trying to contain spiraling property prices which have become unaffordable for the bulk of their own population. No need to delve too deeply into too many theories on this. The breakdown of the major factors affecting property prices as confirmed by the research paper below from BIS:

real house price growth - the perception that investors and buyers get real house price growth; i.e. returns must be higher than nominal inflation; hence the GDP growth prospects and financial balance sheet for the country must be "good-strong"


Australia's Plate Of Worry
net migration inflows - in the 70s and 80s there were waves of migration to developed countries and that was a noted catalyst for higher prices; however from 2000 onwards we have seen the dubious flow of illicit funds from Russia and institutional flow of funds from certain countries' pension funds in particular to the UK and other global cities; for the last 10-15 years the outflow of funds from China to certain investing hotspots have been a big factor as well; hence actual migration of people is no longer necessary as people are a lot more mobile and global in their investment portfolio

size of the existing housing stock - self-explanatory; however the more vibrant a city's economy which will attract the better rental market, is another important supporting factor 

nominal interest rates - self-explanatory


These 4 main factors may have explained much of the price growth from 70s-2000. However, there are two major factors unaccounted for, which may further explain the present stratospheric property prices:

a) the hyper-liberal ways developed nations have been printing money to get themselves out of the few financial crisis

b) the enormous wealth created in China by the middle class 



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Residential investment and economic activity: evidence from the past five decades

BIS Working Papers  |  No 726  |
06 June 2018
PDF full text
  |  29 pages

The paper studies the evolution and key drivers of residential investment in 15 advanced economies since the 1970s. It also analyses how residential investment growth affects overall economic activity and the likelihood of recessions.

Contribution

Most previous research on housing markets has focused on house prices, whereas research on housing quantities - ie residential investment - has been scarce. There has also been little cross-country analysis of the determinants of residential investment. This paper partly fills this gap. It studies the key drivers of residential investment across countries and the impact of residential investment on the broader economy. We provide novel evidence on the effects of monetary policy on the residential investment cycle, highlighting the asymmetric effects of rising and falling interest rates.

Findings

We find that the key drivers of residential investment in advanced economies are house price growth, net migration, the size of the housing stock and nominal interest rates. Importantly, rising interest rates have stronger effects on residential investment than falling ones. This could result from downward rigidity in house prices, which forces housing construction rather than prices to fall as interest rates rise. We also show that declines in residential investment are a good predictor of economic recessions.

Abstract

We analyse the evolution and main drivers of residential investment, using a panel with quarterly data for 15 advanced economies since the 1970s. Residential investment is a notably volatile component of real GDP in all countries in the sample. We find real house price growth, net migration inflows and the size of the existing housing stock to be significant drivers of residential investment across various model specifications. We also detect important asymmetries: interest rate increases affect residential investment more than interest rate cuts, and interest rate changes have larger effects on residential investment when its share in overall GDP is rising. Finally, we show that adding information on residential investment significantly improves the performance of standard recession prediction models.
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Many countries have tried to contain the price surges, from the UK, to Canada, to major cities in China,  to Hongkong, to Australia and even New Zealand. Finally, I think Singapore has come up with the most brutal and (possibly most effective) policies to counter the price bubbles.






ABSD Changes (Singapore)

AS OF JULY 5FROM JULY 6
Singaporeans buying first residential property0%0%
Singaporeans buying second residential property7%12%
Singaporeans buying third and subsequent residential property10%15%
Permanent residents buying first residential property5%5%
Permanent residents buying second and subsequent residential property10%15%
Foreigners buying any residential property15%20%
Entities buying any residential property15%25% (plus additional 5% for developers)


The curtailment for local investors are quite tough but the taxes on foreigners are now quite debilitating. Other countries should try the Singapore way. It is a determined way to quash sentiment.




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