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Kidicious
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Diety of Kidiverse
Mar 2003
time: 21:35
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According to this article at the Economist it's now cheaper to rent a house than it is to buy one in many countries including the US. It seems to me that that is clear evidence of bubbles. People are buying houses only for speculation of capital gains. When prices stop increasing there could be trouble.
quote:
According to our latest house-price indicators, it is now much cheaper to rent than to buy a house in many countries
WHEN The Economist launched its global house-price indicators in 2002, residential-property markets were merely warming up. Today they are red hot in many of the 20 countries we cover: in half of them, prices have risen by around 10% or more in the past year (see table). But for the first time since we started to track them, housing markets in several countries have slowed sharply.
The most dramatic slowdown has been in Australia where, according to official figures, the 12-month rate of increase in house prices fell to only 2.7% in the fourth quarter of last year, down from nearly 19% at the end of 2003. Another index, calculated by the Commonwealth Bank of Australia, which is based on prices when contracts are signed rather than at settlement, shows that average house prices fell by 7% in the year to December; prices in Sydney plunged by 16%. The Reserve Bank of Australia's quarter-point increase in interest rates this week is likely to give prices another downward nudge.
Britain's housing market has also cooled since last summer. The Nationwide index, which we use, was still up by 10% in the year to February, down from 20% growth in July. Other anecdotal evidence suggests that prices have fallen since last summer in many parts of the country.
In contrast, America's housing bubble continues to inflate. Although the rate of increase slowed in the fourth quarter, prices were still up by 11.2% over the year. In California and Washington, DC, housing prices rose by more than 20%. Alan Greenspan, the Fed's chairman, recently admitted in congressional testimony that there may be property bubbles in “certain areas” and a risk that prices could decline. There is certainly evidence that prices are being driven by speculative demand: a new study by the National Association of Realtors shows than one-quarter of all houses bought in 2004 were for investment, not owner-occupation.
House prices are still rising rapidly in continental Europe. French house-price inflation has accelerated to 16%, its fastest on record in real terms and only a whisker behind Spain's 17%. Prices in Italy, Sweden and Belgium are also rising at close to 10%. Excluding Germany, where prices fell again in 2004, average home prices in the euro area have risen by 12.5% over the past year, causing some concern at the European Central Bank.
Punishing prices, puny yields
The main reason why housing markets have cooled in Australia and Britain is that first-time buyers have been priced out and demand from buy-to-let investors has slumped. While house prices have soared, rents have risen modestly or even fallen in some cities. In America, Britain, Spain New Zealand and Australia, average net rental yields (allowing for management fees, maintenance and empty periods) have fallen to 3.5% or less, well below mortgage rates. Shane Oliver, the chief economist at AMP Capital Investors, estimates that net rental yields on houses in Sydney are only 1%. Landlords are nowhere near covering their true costs, but many still hope to make their profit from capital gains. That sounds ominously similar to the days of the dotcom bubble, when it was argued that the link between share prices and profits no longer mattered.
According to calculations by The Economist (with the help of Julian Callow of Barclays Capital), house prices are at record levels in relation to rents (ie, yields are at record lows) in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. America's ratio of prices to rents is 32% above its average level during 1975-2000. By the same gauge, property is “overvalued” by 60% or more in Britain, Australia and Spain, and by 46% in France (see chart).
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Kidicious
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Diety of Kidiverse
Mar 2003
time: 21:35
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Yes, some did get cut off. Here it is.
quote:
The ratio of prices to rents is a sort of price/earnings ratio for the housing market. Just as the price of a share should equal the discounted present value of future dividends, so the price of a house should reflect the future benefits of ownership, either as rental income for an investor or the rent saved by an owner-occupier. To bring the ratio of prices to rents back to equilibrium, either rents must rise sharply or prices must fall. Yet central banks cannot allow rents to surge as this would feed into inflation. Rents directly or indirectly account for 29% of America's consumer-price index, so rising inflation would force the Fed to raise interest rates more swiftly, which could trigger a fall in house prices. Alternatively, if rents continue to rise at their current annual pace of 2.5%, house prices would need to remain flat for over ten years to bring America's ratio of house prices to rents back to its long-term norm. There is a clear risk prices might fall.
Lower real interest rates might justify a higher p/e ratio. For example, real interest rates in Ireland and Spain were reduced significantly when these countries joined Europe's single currency—though not by enough to explain the whole rise in house prices. In Britain, where tax relief on interest payments has been scrapped, real after-tax rates are close to their average over the past 30 years, and so do not justify a higher price/rent ratio. In America, too, real post-tax interest rates are not historically low, in part because mortgage-interest tax relief is worth less at lower rates of inflation. For instance, if interest rates are 10%, tax relief is 30% and inflation is 7%, the real after-tax interest rate is 0%. If interest rates are 6% and inflation is 3% (ie, the same gap as before), and tax rates stays the same, the real interest rate is 1.2%.
The unusual divergence between house prices and rents does not just affect investors; it also undermines the conventional wisdom that it is always better to buy a house, because “rent is money down the drain”. Today in many countries it is much cheaper to rent than to buy.
Rent asunder
Take a two-bedroom flat in London, which you could buy for £450,000 ($865,000). To rent the same flat would currently cost £1,700 a month. In addition to a 6% mortgage rate, a buyer would face annual maintenance and insurance costs of, say, 1.25%. In the first year, the rent of £20,400 compares with total mortgage interest and maintenance payments of £33,000, a saving of £12,600. Interest payments would be less if a large deposit were paid, but in that case the income lost from not investing that money elsewhere has to be taken into account.
Assume that rents rise by 3% a year, in line with wages, while house prices from now on rise in line with inflation of 2%. At the end of seven years (the average time before the typical homeowner moves), you would be almost £35,000 better off renting, taking account of the capital appreciation and buying and selling costs. In other words, even without a fall in real house prices—which many believe to be likely—buying a house in Britain today seems a poor investment.
The figures look even more striking in the San Francisco Bay Area, where it is possible to rent an $800,000 house for $2,000 a month. Making the same assumptions about rents and house prices, but also deducting tax relief on a fixed-rate mortgage and adding property taxes, a buyer would pay $120,000 more over seven years than if he had rented. House prices in San Francisco would need to rise by at least 4% a year (2% in real terms) for it to prove cheaper to buy a house. Since 1950 American house prices in real terms have risen by an annual average of just over 1%. To expect them to rise faster from their current dizzy heights smacks of irrational exuberance, to say the least.
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GePap
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of the Big Apple
Nov 2001
time: 23:35
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From:http://www.citysitesny.com/the-manhattan-market.php
Rental
Current Market Averages
* Doorman Studio: $1,823
* Non-Doorman Studio: $1,316
* Doorman 1 BR: $2,254
* Non-Doorman 1 BR: $1,725
* Doorman 2 BR: $3,117
* Non-Doorman 2BR: $2,442
* Doorman 3 BR: $4,445
* Non-Doorman 3 BR: $3,597
To Buy
Market Averages (second and third quarter 2003):
Condominiums
* Studio: $356,000
* 1 BR: $546,000
* 2 BR: $1,028,000
* 3 BR: $2,295,000
* 4 BR: $4,500,000
Co-Ops
* Studio: $232,000
* 1 BR: $416,000
* 2 BR: $818,000
* 3 BR: $2,085,000
* 4 BR: $3,339,000
The sales figures ignore maintenance, which you have to pay living in a building, which can be several hudred a month, if not more.
Except in the stuidio market, it makes a lot of sense to rent, NOT buy.
here is what the site says about the rental market:
quote:
In the past year and half there has been a huge listing surplus and the record-low interest rates that made buying an appealing alternative to renting, caused Manhattan rents to fall anywhere from 15% to 25%. But because the Manhattan Sales market has become so tight, it is turning would be buyers into reluctant renters. This is causing higher occupancy rates making property managers happier then they have been in years. The spring will also bring forth a surge of new hires resulting in a shrinking supply of available rental units, confirming further signs of a strong real estate market and improving economy. |
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Flubber
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With a view of the Rockies
Aug 2000
time: 22:35
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I know that most of the argument concerns housing as an investment but I tend to like to think of it as more than that. Even if buying costs slightly more, I think you would find many people that would buy since it is creating a "home". I like the idea that I am creating a place for my children to grow up and won't be forced to move when the landlord wants. We bought a house with the idea that we will stay there for as long as we are in Calgary.
-- Buying "freezes" your price at the time of purchase and your only fluctuation is interest rates. Renting in an appreciating market means the liklihood of consistent increases. Note that Calgary has a steady increase in housing prices but that rents have kept pace due to the large influx of people every year . In fact, many people find that their monthly payments go DOWN when they buy a property similar to what they are renting. I do understand and appreciate that buying will be a DISadvantage if the housing market were to crash.
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07-03-2005 18:30
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