Real Global House Prices

The issue of house prices is one that is close to nearly ever citizens heart (and wallet). Whether it is rising house prices (good if you own, bad if not) or falling house prices (bad if you own, good if not) every one has a stake.

The following chart from Mish's Global Economic Trend Analysis as part of a commentary on asset price bubbles is really useful.

The chart shows real (inflation adjusted) house prices in Britain (wow), Australia (impressive), the US (oh dear), Japan and Germany. Looking at the period from 1996 to the 2006/7/8 peaks we see:

• UK prices rises of 149%
• Australian real house price rise of 113%
• US real house price rise of 71%
• Germany real house price rise of -21% (i.e. a fall)
• Japan real house price rise of -31% (i.e. a fall)

The US 30% treasury bond has fallen in interest rate from 7.1% to 4.5%. Assuming a 1.5% margin for home loan rates, mortgage rates have fallen from 8.6% to 6%. Assuming constant real incomes (valid for the US and likely UK and Japan, an approximation for Germany and Australia) we see loan purchasing power rising by 26%. [note calculated with repayments on a $159K loan at 8.6K = $200K loan at 6%].

No obviously mortgage rates will vary somewhat around the world but the trend for the past 10 years has been down. However the practical determinant of changing house prices above these amounts are likely to be government policies (First Home Owner Grants, Sub-prime, etc), financial 'innovations' (option-ARMs, RMBS), and domestic economic strength.

In Australia it seems like the Government is backing the 2/3's of Australian's who own homes against the 1/3 of Australian's who don't (renters and children) by propping up prices at every turn. The next 6-12 months will be very interesting for Australia with the first home grants ending and interest rates rising.

What does this hold for the future? Since the chart Australian house prices have recovered to above their peak, UK and US prices continued to fall but look to have stabilised now around 10% below current levels.

However to the practical voter, it sure looks like unsustainable prices in Australia and the UK. Let's hope the world doesn't go into a 1980-82 style double-dip recession.